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FIN B386F Financial Decision Making

Assignment

Due Date: 10 March 2023

Weighting: 15% of the course

Important note:

You must use word processing software (such as Microsoft Word) to prepare the assignment, and submit it via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date.

Failure to upload the assignment in the required format to the OLE may result in the score of the assignment being adjusted to zero.

Question 1           (50 marks)

Critically analyse how a listed company in Hong Kong or mainland China manages its exposure  to  business  and  financial  risk  and  examine  the  relationship  between  capital structure and stock price.

Students should conduct independent research or investigation on the above topic. Besides, theories and knowledge must be applied and explained to support the student’s arguments. Sources  and references  can be  obtained  from  annual reports, regulatory  filing, publicly available information, newspapers or magazines.

Suggested content

The analysis includes (but is not limited to) the following:

1. Introduction

2. Background of the listed company

3. Analysis of its business and financial risk

4. Examination of the relationship between capital structure and stock price

5. Recommendation

Please state the number of words used. The number of words should be less than or equal to 500. All information covered in this essay must consist of original effort from the student.

Question 2           (50 marks)

Anna  is  the  financial  manager  for  Beta  Corporation.  She  has  been  asked  to  perform  a lease-versus-purchase analysis on a new printing machine. The machine costs $360,000 and will  be  depreciated  by  the  straight-line  method  with  zero  residual  value  over  5  years. Alternatively, the company can lease the machine with year-end payments of $95,000 over 5 years. The company’s tax rate is 35%, and its before-tax cost of borrowing is 10%.

Required:

(a)    Given the above information, calculate the net advantage to leasing (NAL)

for Beta Corporation to obtain the new printing machine, assuming the company will use its own reserves rather than borrowing from the bank.

Which alternative would you recommend? Explain.                                         (18 marks)

(b)    Suppose only $300,000 purchase price of the machine is borrowed from

MU Bank. Should Beta Corporation change its buy or lease decision on

the printing machine? Discuss.                                                                           (8 marks)

(c)    Please comment on the remark, “Leasing is a zero sum game between the lessee and lessor” . (12 marks)

(d)    Briefly discuss the reasons for firms to lease even if NALs are negative.         (12 marks)