Question 1 (Total 16 marks) Titan Battery requires specialized equipment for manufacturing its newly developed long-life battery. Titan can purchase the equipment on market for $2.5 million. This equipment can be depreciated on a straight-line basis over 2 years with a salvage value of $500,000. Alternatively, Titan can lease the equipment from ALC Co. The lease contract will require an annual payment of $1.3 million payable at the beginning of each year Titan has a marginal tax rate of 30% and pre-tax cost of debt of 10% Required: (a) Should Titan purchase or lease the equipment? Show all necessary calculations (b) If the lease contract includes one of the following three options, state whether and how the inclusion (10 marks) would affect the value of the lease to Titan? (6 marks) (1) The lease contract gives Titan the option to purchase the equipment at the fair market value at the end of the lease (2) The lease contract gives Titan the option to purchase the equipment at a price of $200,000 at the end of the lease (3) The lease contract gives Titan the option to cancel the lease on any anniversary date of the contract Question 2: (Total 13 marks) Getaway Ltd. and Funtastic Ltd. both operate in the fast growing business of budget accommodation. They are both all-equity firms and have market values (as stand-alone firms) of $400 million and $150 million, respectively. The Board of Getaway believes that merging with Funtastic will bring a synergy of $80 million The Board of Funtastic has indicated that it will sell the firm for $200 million in cash Required: (a) Calculate the value of Getaway after the merger if it pays $200 million in cash (b) Calculate the NPV of the merger to Getaway (c) If investors estimate a probability of 60% that the merger will take place, calculate the market value of (3 marks) (3 marks) Getaway after it makes the offer but before the merger is completed (4 marks) (d) Calculate the NPV of the merger to Getaway if the market value obtained from part (c) is used. (3 marks) Question 1 (Total 16 marks) Titan Battery requires specialized equipment for manufacturing its newly developed long-life battery. Titan can purchase the equipment on market for $2.5 million. This equipment can be depreciated on a straight-line basis over 2 years with a salvage value of $500,000. Alternatively, Titan can lease the equipment from ALC Co. The lease contract will require an annual payment of $1.3 million payable at the beginning of each year Titan has a marginal tax rate of 30% and pre-tax cost of debt of 10% Required: (a) Should Titan purchase or lease the equipment? Show all necessary calculations (b) If the lease contract includes one of the following three options, state whether and how the inclusion (10 marks) would affect the value of the lease to Titan? (6 marks) (1) The lease contract gives Titan the option to purchase the equipment at the fair market value at the end of the lease (2) The lease contract gives Titan the option to purchase the equipment at a price of $200,000 at the end of the lease (3) The lease contract gives Titan the option to cancel the lease on any anniversary date of the contract Question 2: (Total 13 marks) Getaway Ltd. and Funtastic Ltd. both operate in the fast growing business of budget accommodation. They are both all-equity firms and have market values (as stand-alone firms) of $400 million and $150 million, respectively. The Board of Getaway believes that merging with Funtastic will bring a synergy of $80 million The Board of Funtastic has indicated that it will sell the firm for $200 million in cash Required: (a) Calculate the value of Getaway after the merger if it pays $200 million in cash (b) Calculate the NPV of the merger to Getaway (c) If investors estimate a probability of 60% that the merger will take place, calculate the market value of (3 marks) (3 marks) Getaway after it makes the offer but before the merger is completed (4 marks) (d) Calculate the NPV of the merger to Getaway if the market value obtained from part (c) is used
