Lease Analysis and Merger Questions
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Capital Budgeting
1. What is a sale and lease back and why would a corporation do this?
2. Why might a lease be easier to finance (or do) than a straight borrowing for the purchase of an asset? Explain two reasons
3. When should the cancellation provision be negotiated (before or after the lease is signed)? Pick one.
4. What type of lease shows up on the balance sheet of a corporation?
5. At what cost of money (or rate) do you bring the after-tax cost of the lease payments back to present?
6. At what cost of money (or rate) do you bring the residual value back to present?
7. Would gaining market power be a value or management related reason for merging? Pick one.
8. Would reducing volatility in sales and income (without a commensurate decrease in the cost of capital) be a value or management related reason of a merger.
9. What must be present for there to be a difference between the minimum exchange ratio and the maximum exchange ratio?
10. Assume that you own a company and it is being purchased by another company. You do not believe the synergistic benefits from the merger will materialize in the future. When you are negotiating the sale of your company, should you push for a stock-for-stock exchange or a cash-for-stock exchange is selling your company(disregard any tax consequences)?
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The solution discusses lease analysis and merger.
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1. What is a sale and lease back and why would a corporation do this?
Sale and lease back occurs when one party sells property and immediately leases back the property from the buyer. The property seller turns into the lessee while the buyer is the lessor in the transaction.
By using a sale and lease back a corporation would be able to raise capital while retaining use of the property. GE Commercial Equipment (2001) provides that sale and lease back are structured to release equity a business has in assets and turns that equity into cash. The corporation does not have to tie up money in the asset and it can be used to eliminate the need to raise capital from more expensive sources and also the company receives tax benefits.
2. Why might a lease be easier to finance (or do) than a straight borrowing for the purchase of an asset? Explain two reasons.
A lease may be favorable compared to borrowing to finance an asset purchase since a lease offers higher benefits to the business. One reason for preferring lease over borrowing is interest rates whereby leasing offering a low fixed rate compared to loans which do not have a fixed rate and are higher. Another reason is tax benefits where leasing is subject is to higher tax deductible expense compared to borrowing. Leasing does not require the lessee to have collateral while in borrowing the borrower has to place assets as collateral.
3. When should the cancellation provision be negotiated (before or after the lease is signed)? Pick one.
Before, this is because the ...
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