Accounting and Finance - Warf Computers - Finance function and its role in corporate management Assessment Answer

Internal Code: 1AGDBI

Accounting and Finance Assessment Answer -

Question 1 : Assignment Task: a) Book value of debt b) Book value of equity (2 Marks) c) Book value of the company d) The market value of debt e) The market value of equity f) The market value of the company Rationale This assessment task will assess the following learning outcome/s:

• be able to assess critically the scope of the finance function and its role in corporate management.
• be able to synthesise relevant finance theories that will assist in the evaluation of investment, financing and dividend policies of firms through critical analysis and evaluation.
• be able to apply acquired skills in the evaluation of financial data to enable informed decision making.
• be able to communicate and analyse financial data at an appropriate level for postgraduate finance students.

Using the results you calculated in question 1 above - calculate the following: a) WACC using Book Value b) WACC using the market value Question 2: The Decision to Lease or Buy at Warf Computers Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production. Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $3.6 million. Because of the rapid development of new technology, the equipment falls in the three-year MACRS depreciation class. At the end of four years, the market value of the equipment is expected to be $440,000. Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of $935,000, due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $210,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent. 1. Should Warf buy or lease the equipment? 2. Leasing vs. Borrowing. What are the key differences between leasing and borrowing? Are they perfect substitutes?

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