Mini Case 7 This is a Collaborative Learning Community (CLC) assignment. The purpose of this assignment is to explain core concepts related to stock, equity, debt, and the roles they play in making tactical financial decisions. Read the Chapter 20 Mini Case on pages 844-846 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a and b. Create a 5-10 slide PowerPoint presentation in which you summarize your answers from the mini case. Be sure to include graphs, charts, and trends as appropriate. Present the PowerPoint to class, as directed by your instructor. In addition, submit both your answers to the mini case and your PowerPoint to the instructor. While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion. You are required to submit this assignment to Lopes Write. Please refer to the directions in the Student Success Center. Paul Duncan, financial manager of Edu Soft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primary and secondary school markets. Although Edu Soft has done well, the firm’s founder believes an industry shakeout is imminent. To survive, Edu Soft must grab market share now, and this will require a large infusion of new capital. Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Duncan does not think it would be wise to issue new common stock at this time. On the other hand, interest rates are currently high by historical standards, and the firm’s B rating means that interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to: (1) preferred stock, (2) bonds with warrants, or (3) convertible bonds. As Duncan’s assistant, you have been asked to help in the decision process by answering the following questions. a. How does preferred stock differ from both common equity and debt? Is preferred stock more risky than common stock? What is floating rate preferred stock? b. How can knowledge of call options help a financial manager to better understand warrants and convertibles? Mini Case 8 The purpose of this assignment is to explain core concepts related to lease vs. purchase and tactical financial decisions. Read the Chapter 19 Mini Case on pages 796-797 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a through f. APA format is not required, but solid academic writing is expected. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion. You are required to submit this assignment to Lopes Write. Please refer to the directions in the Student Success Center. Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firm’s brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a 10% interest rate. Although the equipment has a 6-year useful life, it is classified as a special-purpose computer and therefore falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value is $200,000. However, because real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is 40%. You have been asked to analyze the lease-versuspurchase decision and, in the process, to answer the following questions: a. 1. Who are the two parties to a lease transaction? 2. What are the five primary types of leases, and what are their characteristics? 3. How are leases classified for tax purposes? 4. What effect does leasing have on a firm’s balance sheet? 5. What effect does leasing have on a firm’s capital structure? b. 1. What is the present value of owning the equipment? (Hint: Set up a time line that shows the net cash flows over the period to , and then find the PV of these net cash flows, or the PV cost of owning.) 2. Explain the rationale for the discount rate you used to find the PV. c. What is Lewis’s present value of leasing the equipment? (Hint: Again, construct a timeline.) d. What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain. e. Now assume that the equipment’s residual value could be as low as $0 or as high as $400,000, but $200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary but explain how you would modify the analysis if calculations were required.) What effect would the residual value’s increased uncertainty have on Lewis’ leaseversus-purchase decision? f. The lessee compares the present value of owning the equipment with the present value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease? NOTE: Please read the instructions carefully as mentioned above before starting the work. Mini case 7 needs word doc and power point presentation. Mini case 8 needs word doc only
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