Corporate Finance – Final Assignment

CASE 1 (20 points)

You work for a medical research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech

equipment). The scanner costs €4,500,000, and it would be depreciated straight-line to zero over five years. Because of radiation contamination, the scanner

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will be worthless in five years. You can lease the scanner for €1,000,000 per year for five years. You can borrow at 7 percent before taxes. Assume that the tax

rate is 25 percent.

Instructions:

a. Create a lease-versus-buy analysis. Calculate the NPV of leasing. Should you lease or buy? (10 points)

b. What are the differences between an operating lease and a financial lease? Compare their features. (5 points)

c. Explain the impact of operating lease and a financial lease on the balance sheet. (5 points)

CASE 2 (35 points)

Suppose stock in Wesley Corporation has a beta of 0.90. The market return is 11 percent, and the Treasury Bill rate is 5 percent. Wesley’s last dividend was

€1.40 per share, and the dividend is expected to grow at 6 percent indefinitely. The stock currently sells for €47 per share. Wesley’s target capital structure is

1/3 debt and 2/3 equity. Its cost of debt is 10 percent before taxes. Its tax rate is 25 percent.

Instructions:

a. What is Wesley’s cost of equity capital? Assume that you equally believe in the CAPM approach and the dividend growth model. (10 points)

b. What is Wesley’s WACC? (5 points)

c. Wesley is seeking €20 million for a new project. The necessary funds will have to be raised externally. Wesley’s flotation costs for selling debt and

equity are 3 percent and 14 percent, respectively. If flotation costs are considered, what is the true cost of the new project? (10 points)

d. Under what circumstances would it be appropriate for Wesley Corporation to use different costs of capital for its different operating divisions? What are

two techniques you could use to develop a rough estimate for each division’s cost of capital? (10 points)

CASE 3 (25 points)

Firm Alpha is analysing the possible acquisition of Firm Beta. Both firms have no debt.

There are two alternatives for Firm Alpha: to use cash or stock as payment.

You have the following premerger information:

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