Fundamentals of Corporate Finance

Writing instructions

Helpful Reading the textbook: Fundamentals of Corporate Finance, Fourth Edition, By: Parrino, Bates, Gillan, Kidwell Read the following chapters from your textbook: • Chapter 16: “Capital Structure Policy” • Chapter 18: “Business Formation, Growth, and Valuation” Chapter 16 introduces the factors involved in setting capital structure policy and provides a review of M&M theories. Chapter 18 examines the basic factors involved in business valuation. The business valuation design of breakeven analysis and the going concern methods will be reviewed. Please review attached Rubric & Writing Instructions. This competency assessment assesses the following Outcome(s): MT480M4-4: Assess investment options based upon cost of capital and expected returns. GEL-7.02: Apply ethical reasoning to ethical issues within the field of study. There are two parts to this assessment. Both parts should be submitted as separate Word documents Part 1: Investment Options In this part of the assessment, you will be assessed based on the following Outcome: MT480M4-4: Assess investment options based upon cost of capital and expected returns. The assessment requires the application of the net present value (NPV) model to assess investment options given cost of capital, commonly referred to as discount rates, and required rates of returns. You will explain the role of a discount rate in evaluating the NPV model and compare investment options as cost of capital increases or decreases. The use of a financial calculator and/or Excel will be required for this part of the assessment. Read the scenario and address all of the checklist items. Scenario: A new product manager presents to you, the chief financial officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of Year 4, will bring both praise and approval. You explain the company uses a 12% discount rate for cash flows and project-related budgeting. You take the time to present the details of the net present value (NPV) model used to assess product proposals. The data is below. Project Outflows to Buy Machine Day 1 Cash Out -$70,000 12% discount rate applied. End Year 1 Cash Repayment $10,000 End Year 2 Cash Repayment $20,000 End Year 3 Cash Repayment $30,000 End Year 4 Cash Repayment $30,000 To educate the new manager, and as CFO, you take the time to evaluate the following: Checklist: • Evaluate how the time value of money concept results in a discounted cash flow in Year 4 (an amount less than $30,000). • Assess the investment option using a 12% cost of capital discount rate by applying the NPV model. Include values in your assessment. Provide the NPV at a 12% cost of capital discount rate. Include values in your assessment. • Assess the investment option when a 7% cost of capital discount rate, versus a 12% cost of capital discount rate, is applied. Include values in your assessment. Provide the NPV at a 7% cost of capital discount rate. Submit a 2- to 3-page paper with an additional title page in APA 7 format. Please label your assessment submission as “MT480M4_Part1_your name” and submit it to the MT480M4-1 Competency Assessment Dropbox. Part 2: Off-Balance Sheet Accounting and Ethical Study In this part of the assessment, you will be assessed based on the following Outcome: GEL-7.02: Apply ethical reasoning to ethical issues within the field of study. Companies use off-balance sheet accounting so that they do not have to include certain assets and liabilities in their financial statements. Off-balance sheet accounting is often used to make the balance sheet look like the company has less debt than it actually does. One method used by companies to achieve off-balance sheet accounting is classifying capital leases as operating leases. New GAAP accounting rules and the Sarbanes–Oxley Act now require that capital leases must be included on the balance sheet as both an asset and liability. However, leases with a duration of less than 12 months and other long-term leases are still excluded from this reporting. Off-balance sheet accounting is beneficial to companies as it eliminates both assets and debt from the balance sheet, improves companies’ liquidity ratios such as its current ratio and quick ratio, and lowers leverage ratios such as debt to equity and debt to asset. You are a new accountant for a company and have discovered that the company’s management has formed a new corporation that will build a new corporate headquarters for the company and then lease the asset to the company on a 30-year lease. Thus, allowing the company to employ off-balance sheet accounting for the new assets. The arrangement will also allow management to make additional income from their new venture. Scenario: The board of directors, shareholders, and stakeholders are just now learning of this arrangement to employ off-balance sheet accounting for the new office building and of management’s profit arrangement from the new company. An alternative to this arrangement would be a sale leaseback. Read more about sale lease backs at the following site: Singer, R., Winiarski, H., & Coleman, S. (2020). Accounting for sale and leaseback transactions. Journal of Accountancy. Checklist: • Explain to what extent the corporation’s shareholders might feel the corporation breached any measures of an entity of the highest ethical standards. • Explain to what extent the corporation’s board of directors might ever feel that management breached any measures of an entity of the highest ethical standards. • Use at least two of the ethical viewpoints as presented in ethical approaches which are (Consequential, Nonconsequential, or Virtue Ethics Theories) to provide the ethical reasoning to address your company’s use of off-balance sheet accounting and managements profiting from the arrangement. Specify the approaches you use. Address the following items: • Address all the checklist items. • The main points of the response should be developed and explained clearly with appropriate financial and accounting terminology. • Support all arguments (no errors in logic) in responding to checklist items. Reference Individual tax reform and alternative minimum tax: 115th Congress public law 97. (2017). Submit a 2- to 3-page paper with an additional title page in APA 7 format

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