corporate finance

BCO315 Corporate Finance: RESIT Task brief & rubrics

Task

Individual Resit task.

· You should solve 4 questions below.

· The Resit should be submitted in .doc or .pdf file format.

Formalities:

· No maximum/minimum word count. But the calculations should be shortly explained.

· Font: Arial 12,5 pts.

· Text alignment: Justified.

· The in-text References and the Bibliography have to be in Harvard’s citation style.

Weight: Each question is 25% of final grade. Final grade is capped at 70 points.

It assesses the following learning outcomes:

· Demonstrate a deep understanding of the theory and practices of financing a firm and its capital structure.

· Discuss and analyze the benefits of leasing versus the ownership of assets.

· Analyze the concepts underlying the WACC

· Critically evaluate dividend policy

Problem 1 (25 points)

Your firm is considering leasing a new computer. The lease lasts for 4 years. The lease calls for 5 payments of $450 per year with the first payment occurring immediately. The computer would cost $5,900 to buy and would be depreciated using the straight-line method to zero salvage over 4 years. The firm can borrow at a rate of 5%. The corporate tax rate is 20%. What is the NPV of the lease?

Problem 2 (25 points)

Consider the following information for two all-equity firms, Firm A and Firm B:

Firm A Firm B

Shares outstanding 1,000 4,000

Price per share $ 40 $ 30

Firm A estimates that the value of the synergistic benefit from acquiring Firm B is $5,000. Firm B has indicated that it would accept a cash purchase offer of $35 per share. Should Firm A proceed?

Problem 3 (25 points)

The total book value of WTC’s equity is $10 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. The firm’s bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm’s tax rate is 40%. Find the company’s WACC.

Problem 4 (25 points)

EU Corp. would like to have a 10.4 percent weighted average cost of capital. The company’s cost of equity is 12 percent, and its pre-tax cost of debt is 8.8 percent. The tax rate is 20 percent.

What is the company’s target debt–equity ratio?

Rubrics

	Exceptional 90-100	Good 80-89	Fair 70-79	Marginal fail 60-69
Knowledge & Understanding (20%)	Student demonstrates excellent understanding of key concepts and uses vocabulary in an entirely appropriate manner.	Student demonstrates good understanding of the task and mentions some relevant concepts and demonstrates use of the relevant vocabulary.	Student understands the task and provides minimum theory and/or some use of vocabulary.	Student understands the task and attempts to answer the question but does not mention key concepts or uses minimum amount of relevant vocabulary.
Application (30%)	Student applies fully relevant knowledge from the topics delivered in class.	Student applies mostly relevant knowledge from the topics delivered in class.	Student applies some relevant knowledge from the topics delivered in class. Misunderstanding may be evident.	Student applies little relevant knowledge from the topics delivered in class. Misunderstands are evident.
Critical Thinking (30%)	Student critically assesses in excellent ways, drawing outstanding conclusions from relevant authors.	Student critically assesses in good ways, drawing conclusions from relevant authors and references.	Student provides some insights but stays on the surface of the topic. References may not be relevant.	Student makes little or none critical thinking insights, does not quote appropriate authors, and does not provide valid sources.
Communication (20%)	Student communicates their ideas extremely clearly and concisely, respecting word count, grammar and spellcheck	Student communicates their ideas clearly and concisely, respecting word count, grammar and spellcheck	Student communicates their ideas with some clarity and concision. It may be slightly over or under the wordcount limit. Some misspelling errors may be evident.	Student communicates their ideas in a somewhat unclear and unconcise way. Does not reach or does exceed wordcount excessively and misspelling errors are evident.