Assignment $3$: Case Study $-$ America Coffee House

It is January $1$st$,2018.$ You are a senior analyst at America Coffee House Inc. $($ACH$),$ a leading coffee chain and wholesaler of coffee$/$bakery products in North America. The CEO of America Coffee House, Susan Matthews, has reached out to you to look at two options regarding an investment, building on your analysis from Assignment $1$ and Assignment $2.$

Purpose

Under this case approach, you will demonstrate your ability to undertake a detailed analysis to evaluate the buy versus lease options for an investment proposal, on a qualitative and quantitative basis. You will also be required to calculate the weighted average cost of capital $($WACC$).$ A supplementary scenario analysis of leasing options is required.

How to Proceed

Create a title page with your purchase versus lease report name and author identification.

Explain the advantages and disadvantages of leasing, including the possible reasons, right or wrong, that would make a company lease an asset $($from the lessor and lessee perspective$).$

Calculate the weighted average cost of capital $($WACC$)$ to use in your net advantage to leasing $($NAL$)$ analysis, rounding to the nearest one tenth of a percent.

Prepare your Net Advantage to Leasing analysis of the investment using the WACC as the discount rate. In addition, determine the impacts of the sensitivity analysis in the case, including

changes in payments from beginning of period to end;

changes in salvage value;

security deposit; and

the break$-$even lease payment.

Explain and evaluate if the investment should be purchased or leased, depending on the different scenarios analyzed.

Determine the classification of the lease option being considered, and indicate what the effect would be on the statement of financial position.

Format for Submission

Your report narratives may be done in Word or Excel, but calculations and tables of values must be prepared in Excel with the amounts derived from actual formulas that use your variables, rounded to four $(4)$ decimals or lower.

The Excel tab worksheet must be print and presentation ready, formatted to print in $2$ to $3$ pages without page fragmentation of equations or tables between pages.

It is permissible to break your report down using the questions listed above as headings.

Submit your report file$($s$)$ into the Assignment $3$: Case Study dropbox on UM Learn.

Your assignment must be submitted by the deadline date found in the course schedule provided in the Course Outline.

Grading

You will be assessed in accordance with the following rubric:

Q$1$

Title Page, Readability, Format, Spelling and Grammar

Marks

Student

Title Page, Readability, Format, Spelling & Grammar $12$

Q$2$

Qualitative Discussion of Leasing vs$.$ Purchasing

Marks

Student

Advantages vs$.$ Disadvantages $4$

Reasons for Lessor to lease $($at least three$)4$

Reasons for Lessee to lease $($at least three$)4$

Q$3$

WACC Calculation

Marks

Student

Weighted Cost of Equity

Growth Calculation $3$

Dividend$/$Stock calculation $3$

Calculation of $ amount of Common Equity $2$

Calculation of weight in capital of Common Equity $2$

Weighted Cost of Debt

After$-$tax cost of debt $3$

Calculation of weight in capital of Debt $2$

Weighted Cost of Preferred Equity

Cost of Preferred Stock $3$

Calculation of weight in capital of Preferred Stock $2$

WACC Calculation completed $4$

Q$4$

Financial Forecast

Marks

Student

Initial Analysis

WACC utilized as discount rate $2$

Correct term applied $2$

Correct use of initial investment $2$

After$-$tax leasing payments calculated $2$

Present value of after$-$tax leasing payments $2$

Tax Shield calculation $6$

Present value of Salvage value $2$

Lease payments at beginning of period $2$

Scenario Analysis

A$.$ Change in payments from beginning to end $4$

B$.$ Changes in Salvage Value $4$

C$.$ Impact of Security Deposit with end payments $4$

D$.$ Breakeven lease payment $4$

Q$5$

Evaluation of Leasing Options

Marks

Student

Recommendation for original option $-$ lease or buy $2$

Recommendation for scenarios:

Change in payments $2$

Changes in salvage value $2$

Security deposit impact $2$

Q$6$

Lease Classification

Marks

Student

Determines correct leasing classification $4$

Discusses impact on financial statements $4$

Total

$100$

$0$

America Coffee House Case Study

Investment Decision

Ms$.$ Matthews is currently weighing her options for new refrigeration equipment she is considering for her expansion of frozen yogurt offerings. This equipment would be important for distribution and storage facilities to store yogurt before delivery to retail operations. She is currently working out a deal with Blizzard Inc.; a US ice cream manufacturer that is offering to lease brand new equipment it has acquired to ACH. Ms$.$ Matthews is also considering just purchasing the equipment up front from the original equipment manufacturer. She is trying to understand w