question 1.) Faulkender and Smith (2016) find firms operating in countries with higher tax rates tend to use more debt. In years when tax rates are lower, firms are found to decrease leverage levels. Furthermore, they show firms in all countries borrow less than their full borrowing capacity.

Requirement: Critically comment on these findings in relation toModigliani-Miller(M&M) theory (with tax) by answering the following tow questions. .

a) In what respect the above findings are consistent with the prediction of M&M (with tax) theory?

b) In what respect the findings are not consistent with the predication of M&M theory (with tax) and what could be the reason(s)?

Reference:Faulkender, M., & Smith, J. M. (2016). Taxes and leverage at multinational corporations.Journal of Financial Economics,122(1), 1-20.

Question 2.) NBT ltd is a sportswear manufacturer. The company recently plans to upgrade its production using automatic machines. Because of the high costs of the machines, the company is considering a lease opportunity offered by a finance company called JET Finance who charges $1.29 million lease payment per year for 20 years. NBT finds this offer acceptable but wishes to negotiate for a better offer.

The following list shows the necessary information for conducting an analysis on this offer.

cost of machine: $15,000,000

useful life of the machine: 20 years

depreciation method: straight-line for 20 years with 0 residual value.

lease term: 20 years

cost of debt for NBT: 6% p.a.

tax rate for NBT: 20%

tax rate for JET Finance: 35%

Requirement: determine the minimum lease payment that can be accepted by JET Finance.

Question 3.) SWAN Petroleum Corp.holds a permit which entitles the company to explore and extract crude oil in a petroleum field. The field contains around 2 million barrels crude oil reserve. The permit only allows the holder to start extraction either now (t=0) or in exactly two years (t=2) at a total cost of $70 million (assume the cost remains constant regardless of time). The current crude oil price is $40/barrel and the price evolves following a binomial process. In each year of the next two years, the oil price may increase by 20% p.a. or decrease by 10% p.a. randomly. Assume the operating expense is $4/barrel and the company can complete extraction and sale once it decides to start. Risk free interest rate is 4% p.a.

Requirement: Determine whether it's optimal for the company to start extraction now or in two years.

Hint: the oil field is an asset whose value is equal to the total sales after the operating expenses.