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FIN 401
Melissa Toffanin

COC of levered firmRRR CdTdk x 105k1kSdTEDPCHAPTER 14 COST OF CAPITAL COC of unlevered firmRdk x 11knEWACCWRWR1TWREEDDPPFLOTATION COSTSWACCSTEP 4 Find PV of Salvage ValueFlotation costs costs of issuing new securitiesUsing CASIO n of years IR PMTD Never use book value except in TWO casesCALC WEIGHTED AVERAGE FLOTATION 0 FVSalvage Value FIND PV1 Privately traded firm no info about COSTSSTEP 5 Find PV of Misc Cash Flows ie stockbondf EV x fDV x fmaintenanceA ED2 Publicly traded firm restructuring in capital Let x needed to cover flotation costsSTEP 6 Find NAL using formulastructure so there is no info about stockbondx 1fInitial InvestmentIf NAL0LEASEAWEV financed w common equityExAmount needed to invest to cover flotation If NAL0BUYEMV of equity os shares x share pricecostINDIFFERENCE LEASE PAYMENTSWPV financed w preferred stocksP1 Set NAL0 then solve for ATLP PMTCHAPTER 22 LEASINGPMV of preferred stock os shares x ex 06000000PVATLP158075540 Lessee user of asset makes payments price 49875398 Lessor owner of asset receives payments WDV financed w debtDPVATLP 392049062 Leasing has to do with financial decisions DMV of Debt os bonds x bond priceUsing CASIOPV392049062 n5 iAlternative form of financing for the firm VMV of firmEPD544 Compute PMT86928725 aftertaxIf the project has positive NAL lease is COST OF EQUITY869287251036135826133 pregood Deciding whether to lease or not is to 1 Dividend Growth Modeltaxminimize cost better deal over borrowing RDPg where D D1gE101 0 RANGE OF ACCEPTABLE LEASE Leasing is a how you get it decision NOTE Dto be paid Dpastcurrent10PAYMENTS3 Types of Financial Leases ADVANTAGESBE for lessor apply tax135826133 1 TaxorientedTrue LeaseTax LeaseEasy to understandBE for lessee no tax so you redo the sameLessor is owner for tax purposes DISADVANTAGESsteps but with the before tax rateConditional sale agreementsecure loanOnly applicable to comp paying 06000000PVATLP43227953Applicable when lessee is not in a position to dividendsPVATLP 392049062 use tax credits or depreciation deductionsNot appl if divid not growing at const Using CASIO PV556772047 n5 i Lessee benefits bc lessor may return a rate85 Compute PMT130220901 portion of tax benefits in form of lower leaseSensitive to est growth rate changeTherefore lessor130220901 and lessee paymentsDoesnt explicitly consider risk 1286661602 Sale and Leaseback Agreement REASONS FOR LEASING Similar to straight loan 2 CAPM or SMLGood Reasons Lessee buysalready owns item sells to RR ER REFEMFTaxes may be reducedlessor who leases it back to the lessee Risk PremiumER RMF Eg Library books Medical equipment Market ReturnRMTransfers uncertainty from lessee to lessor3 Leveraged LeaseThe lessor borrows a ADVANTAGESLower transaction costs main reason for substantial fraction of the cost of the leasedExplicitly Adju
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