• Capital Budgeting Decisions: These decisions focus on the allocation of financial resources to long-term investments like new equipment, buildings, or product development. The goal is to choose projects with the potential to generate positive cash flows and increase shareholder value.
• Capital Structure Decisions: These decisions determine the mix of financing sources used to fund the company’s operations and investments. This includes debt (bonds, loans), equity (common stock), and retained earnings. The goal is to find a capital structure that minimizes the company’s overall cost of capital.

Operating Lease vs. Capital Lease:

• Operating Lease: Similar to renting, an operating lease gives the company the right to use an asset for a specific period but doesn’t transfer ownership. The lease payments are considered operating expenses and don’t appear on the company’s balance sheet as debt.
• Capital Lease: Similar to buying on credit, a capital lease transfers most of the risks and rewards of ownership to the lessee (company) even though legal ownership might not be immediate. Capital leases are reflected on the company’s balance sheet as both a liability (lease obligation) and an asset.

The distinction between the two depends on specific criteria set by accounting standards. Factors like the lease term compared to the asset’s useful life and the purchase option at the end of the lease term influence the classification.

Exercise 2: ABC Ltd.

Assumptions: Total Assets = Total Equity + Liabilities (Since no liabilities are mentioned)

1. Value per Share (Assuming Total Assets Reflect Company Value):

We don’t have information about the total assets or number of liabilities (if any) to calculate the exact value per share.

2. Balance Sheet After $200,000 Dividend:

• Assets: (Original Amount – $200,000)
• Liabilities: (Original Amount – Assuming no liabilities)
• Shareholders’ Equity: Common Stock – $200,000 (Reduction due to dividend)

New Share Value: (Common Stock Value After Dividend) / Number of Shares Outstanding

3. Balance Sheet After Stock Repurchase:

• Assets: (Original Amount)
• Liabilities: (Original Amount – Assuming no liabilities)
• Shareholders’ Equity:
  • Common Stock: (Original Amount)
  • Treasury Stock: $200,000 (Represents repurchased shares)

New Share Value: (Common Stock Value After Repurchase) / (Number of Shares Outstanding – Repurchased Shares)

Exercise 3: Bigfi, Inc. Rights Offering:

1. New Market Value:

• Pre-Offering Value: 300,000 Shares * $20/Share = $6,000,000
• New Shares Issued: 20,000 Shares
• Subscription Price: $15/Share
• New Capital Raised: 20,000 Shares * $15/Share = $300,000
• Post-Offering Value: $6,000,000 + $300,000 = $6,300,000

2. Ex-Rights Price:

Theoretical Ex-Rights Price = Market Price Before Offering – Value of Right

Calculating Value of Right is complex and requires additional information. Financial calculators or spreadsheet functions can be used to determine it.

3. Value of a Right:

Value of Right = Market Price Before Offering – Ex-Rights Price

Exercise 4: BIGCO WACC Calculation:

Step 1: Cost of Equity (Ke)

We can use the Capital Asset Pricing Model (CAPM):

Ke = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate)

Ke = 4% + 1.2 * (6.5% – 4%) = 7.8%

Step 2: Cost of Debt (Kd)

We need additional information:

• Market Price of Debt: Since the bonds are selling at par (100% of face value), the market price equals the face value (500€).
• Coupon Payment: Coupon Rate * Face Value = 6.5% * 500€ = 32.5€

Kd = (Coupon Payment / Market Price of Debt) * (1 – Tax Rate)

Kd = (32.5€ / 500€) * (1 – 0.25) = 0.065 (or 6.5%)

Step 3: Weight of Equity (We) and Weight of Debt (Wd)