Mini Case 7 Presentation Assessment Descriiption This is a Collaborative Learnin

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Mini Case 7 Presentation
Assessment Descriiption
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 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a and b.
Mini Case 7 Ch. 20 from textbook:
Paul Duncan, financial manager of EduSoft 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 EduSoft has done well, the firm’s founder believes an industry shakeout is imminent. To survive, EduSoft 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 an-swering 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 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a through f.
Mini Case 8 Ch. 19 from textbook:
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 a6-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 25%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.
A. Questions to answer:
(1) Who are the two parties to a lease transaction?
(2) What are the four 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. Questions to answer:
(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 t 5 0 to t 5 4, and then find the PV of these net cash flows, or the PV of owning.)
(2) What is the discount rate for the cash flows of owning?
C. What is Lewis’s present value of leasing the equipment? (Hint: Again, construct a time line.)
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’ lease-versus-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?
(word doc attached as well for reference

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