Corporate finance.

BCO315 Corporate Finance Task brief & rubrics

Task: Final Assignment

· Individual task

· The student will answer all the questions and problems below.

Formalities:

· You should submit a document in Excel format.

· Font: Arial 11 pts.

· Text alignment: Justified.

Submission: Week (8) – Via Moodle (Turnitin). Sunday 18th July at 23:59 CEST.

Weight: This task is a 60% of your total grade for this subject.

This task assesses the following learning outcomes:

· Evaluate and advice on a firm going from private to a public company.

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

· Analyze the concepts underlying the firm’s cost of capital (WACC).

· Discuss the forms of acquisition.

· Critically evaluate what is financial distress.

ASSIGNMENT QUESTIONS:

IMPORTANT: SHOW YOUR DETAILED SOLUTIONS FOR EACH QUESTION.

Problems (60 points)

1.- The company Hermanos Lelio Corp.'s stock is currently selling at €50 per share.

The company has 1million common shares outstanding, and they have a new project in mind. The investment needed is €5 million.

What are the ex-rights stock price, the value of a right, and the appropriate subscription prices under the following scenarios?

1. Two shares of outstanding stock are entitled to purchase one additional share of the new issue.

2. Five shares of outstanding stock are entitled to purchase one additional share of the new issue.

2.- Hannacorp beauty is willing to invest in a new lab equipment with a cost of€1 Million, the equipment has an expected life of 7 years.

The tax rate is 25%, and Hanna is considering whether to buy or lease the equipment, assuming that they could borrow a loan from the bank at the interest of 8 percent.

The request an offer from BBVA leasing services that requests an annual lease price of €191227,4.

What would you advise them to do, explain all the calculation steps and what is the process?

3.- Ikibana restaurants, Inc., has a target debt–equity ratio of 55%. Its WACC is 15 percent, and the tax rate is 25 percent.

a)If the cost of equity is 20 percent, what is its pretax cost of debt?

b) If instead you know that the aftertax cost of debt is 10 percent, what is the cost of equity?

4.- Tesla Corporation has acquired BMW in a merger transaction.

The fixed Assets of Tesla have a market value of 10 Billions, the market values for the other assets are the same as book values.

The market value for BMW fixed assets is 15 Billions, the market values for the other assets are the same as book values.

Assume that Tesla issues 25 Billions in new long-term debt to finance the acquisition.

The following balance sheets represent the premerger book values.

Tesla
Current assets	2 €	Current liabilities	2 €
Other assets	1 €	Long-term debt	15 €
Net fixed assets	10 €	Equity	-4 €
Total	13 €		13 €
BMW
Current assets	4 €	Current liabilities	5 €
Other assets	2 €	Long-term debt	0 €
Net fixed assets	15 €	Equity	16 €
Total	21 €		21 €

Prepare the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes.

5.- You are told that company A has total earnings for the year 2020 of €5 Millions, a price per share of €20 and 1 Million shares outstanding.

Company A would like to acquire company B, that has total earnings for year 2020 of €2 Millions, a price per share of €10 and 0.3 Million

shares outstanding. The proposal for acquisition is done via an exchange of stock at a price of €20 per share for the stocks of company B.

None of the companies has outstanding debt.

a) What are the EPS of company A after the merger?

b) What will be the new price per share for company A if the price–earnings ratio does not change?

c) If there are no synergy gains, what will the share price of A be after the merger? What will the price–earnings ratio be?

6.- Capellanes S.L. has a target capital structure of 50 percent common stock and 50 percent debt. Its cost of equity is 25 percent, and the cost of debt is 4 percent.

You are requested to prepare a DCF calculation considering that the investment takes place in Spain, where the applicable tax rate is 25%, find the required discount rate.

Questions (40 points)

a) What are the key differences between leasing and borrowing?

b) Which is the appropriate discount rate to use in lease evaluation?

c) If you want to invest in a house in order to rent it, and you can borrow all the money you need at 6 percent, which is the discount rate that you will use to find the NPV of the project?

d) Explain why diversification per se is probably not a good reason for merger.

e) Is there a way to predict bankruptcy? Explain.

Rubrics

	Descriptor
9-10	The student demonstrates an excellent understanding of the concepts.
8-8.9	The student demonstrates a good understanding of the concepts.
7-7.9	The student demonstrates a fair understanding of the concepts.
6-6.9	The student demonstrates some, but insufficient understanding of the concepts.
3-5.9	The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student.
1-2.9	The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts.
0	The student leaves the question blank or cheats.