Question 1 Leasing (25 points) Assume the year is 2017. TrigCo is considering leasing a new equipment that it requires, for $155,000 a year, payable at the beginning of the years. The cost of the new equipment is $900,000, has a CCA rate of 25% and will last for 6years. The expected scrap value is $150,000. Assume that the first CCA tax deduction would be at the end of the first year. TrigCo has lots of other assets in the asset pool. The tax rate is 30% and the cost of debt is 7%. In 2017, the half year rule is applicable to this equipment. a) What should be the appropriate discount rate for analysing this lease? Justify. b) List the relevant cash flows from lessee's point of view and state when they occur and what type (inflow/outflow) they are. c) Calculate the PVs of all but the initial cash savings. d) Calculate the NAL from lessee's point of view and whether leasing is financially feasible. e) What would be the indifferent pre-tax lease payment for the lessee? f) What would be the NAL for lessor (state this without any calculation) if lessor has the same tax rate and borrowing cost? Why? g) What is meant by "Leasing Paradox"? How is it resolved in real world? Question 2 M&A (25 points) Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has 3,000,000 shares outstanding, selling at $50 per share. SDP has 2,000,000 shares outstanding, selling at $17.50 per share. This merger is expected to create an incremental after-tax cash flow of $1,500,000 on a perpetual basis due to economies of scale achieved. These two companies have the same risk in their cash flows, and the cost of capital of SCC is 15%. a) Calculate the synergy of the merger. b) If SDP can be acquired for $20 a share, calculate NPV of the acquisition for SCC. c) What will SCC sell for when the market knows that SCC plans to buy SDP $20 per share? What will SDP sell for? What are the percentage gains to the shareholders of each firm? Hint: Consider per share gain for both companies' shareholders. d) What is the maximum price or break-even price SCC should offer to SDP shareholders? e) Now suppose the merger takes place through an exchange of stocks based on premerger value SCC and the deal price. What will be price of the merged firm? What is the NPV? Why it is lower now? f) Which method cash or stock exchange is better for the acquiring firm? g) Briefly explain two pre-offer and two post-offer tactics to prevent hostile takeover. Financial Ratios (20 points) The financial statements of Snow Flakes Corporation Smow Flakes Corporation Statement of Financial Position As at December 31, 2023 (Numbers are in thousand dollars) Assets Current assets Cash Accounts receivable Inventory 31-Dec 31-Dec 2023 $ 2022 $ 876 585 674 743 1,489 1,156 3,039 2,484 Snow Flakes Corporation Statement of Comprehensive Income For the year ended December 31, 2023 (Numbers are in thousand dollars) Sales Cost of goods sold Gross profit Total current assets Non-current assets Sale and marketing General and administrative Property, plant and equipment 2,326 2,702 Total non-current assets 2,326 2,702 EBITDA Total assets 5,365 5,186 Liabilities and shareholders' Equity Current liabilities Accounts payable Notes payable Total current liabilities Long-term liabilities Long-term debt Total long-term debt Amortization and depreciation EBIT 7,431 4,415 3,016 1,420 2,176 464 463 398 969 1,131 Interest 1,432 1,529 Income tax expense 141 126 Net income 197 1,466 1,378 1,466 1,378 Dividend paid 79 2,898 2,907 Net addition to retained earnings 118 Total liabilities Shareholders' equity Common stock and paid-in surplus 1,570 1,500 Retained earnings 897 779 Total shareholders' equity 2,467 2,279 Total liabilities and shareholders' equity 5,365 5,186 Using the information provided in the financial statements of Snow Flakes Corporation, please answer the following questions. Please write the relevant formula(s) when you perform a financial ratio calculation in order to obtain the full mark. a) What are the sources of the corporation's cash for 2023? Please provide two examples to answer the question; what are the usages of the corporation's cash for 2023? Please also give two examples (4 pts). b) What is the corporation's Net Working Capital ratio for 2023? (2 pts) c) What is the corporation's Equity Multiplier for 2023? (2 pts) d) What is the corporation's Days Sales in Inventory for 2023? (2 pts) e) What is the corporation's Net Working Capital Turnover rate for 2023? (2 pts) f) What is the corporation's Cash Coverage ratio for 2023? (2 pts) g) What is the corporation's Market-to-Book ratio when: i. ii. Snow Flakes Corporation had 199,700 shares of common stock outstanding at December 31, 2023, and The corporation's market price was $14 per share at December 31, 2023? (2 pts) h) ROE (Return on Equity) can be expressed as the product of three ratios; Please list the formulas by using three ratios. Please calculate the corporation's ROE ratio for 2023 by using the three relevant ratios (4 pts)