29116520
29116520
29116520
MM 5007
Corporate Finance
In early 2016, Mr. Suger Hu, an analyst in the Marketing and Sales Group of the Tongli
Mechanical and Electronic Group Co., Ltd., had to recommend to the division sales manager,
Bruce Kho, the terms under which Tongli would lease one of its advanced systems to
WANDITEX Knitting Factory in Bandung, Indonesia, a highend fashion garment. The CFO of
WANDITEX should Evaluate its current financial condition since WANDITEX is a highly
leverage and marginally profitable company. It gives complicated effects to its financial
condition.
WANDITEX is willing to get an automation system to cut cost and accelerate the
production. This consideration was made after seeing the large backlog orders from the
customers. There are 3 investment opportunities at the moment. One of them is
having automation system.
II. Analysis
Based on the Companys objective, the CFO should do an observation and evaluation about
the projected to increase the shareholders wealth. The first analyze that the company should
choose the best investment opportunity which are property, automation existing, and marketable
securities. The best choise must the most feasible investment which has a positive NPV and
IRR above the WACC and even beter bellow the after-tax cost debt.
WACC analysis
Assumptions Source
SIMA PEFINDO Beta Stock :
Beta Stock 71.5% 0.715 http://www.pefindo.com/index.php/fileman/file?file
=15
Risk Premium 4.75% 0.0475 BI Rate
Asumption Source
COST OF DEBT 13%
Tax 0.25 PPH 21
Cost of Debt After
9.75%
Tax
3.31%
inflation Rate
weighted
Source of Capital weight cost cost
Debt 39% 10% 3.80%
Equity 34% 5.46% 1.91%
WACC 9.02%
According to the analysis, the cost of equity WANDITEX is 6.53% (which are the interest
that the company will pay on its borrowing). Cost of Debt is 13% (which are the interest that the
company wil pay on its debt. And the Value of Wanditex WACC is 9.02%
After analy the WACC, we should to calculate the investment opportunity from the
company. NPV and IRR should below WACC.
Marketable Securities
Year Free Cash Flow PV Free cash Flow
Investement (1,500,000)
0 1,650,000 1,650,000
1 1,820,000 1,820,000
2 2,000,000 2,000,000
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
8 0 0
9 0 0
10 0 0
Based on the calcutaion and analysis, the most profitable Investment is Automation
Existing Plan, because it has the bigges NPV and IRR Value, and the IRR is bigger than
WACC rate. The company should to consider about purchase Automation Existing Plan as its
Investment.
Lease or Loan Strategy Analysis
Scenario A B C D
Effective tax rate 25.0% 25.0% 0.0% 0.0%
Pretax cost of debt 10.0% 12.5% 10.0% 12.5%
After-tax cost of debt 7.50% 9.38% 10.00% 12.50%
Shima Shieki
NPV of loan $871,757 $832,326 $840,395 $811,437
NPV of lease $708,877 $680,959 $554,539 $537,187
IRR of lease 12.93% 12.93% 1.54% 1.54%
Lease advantage over borrowing $162,879 $151,368 $285,856 $274,249
Marui Textile
NPV of loan $824,327 $789,470 $724,721 $704,592
NPV of lease $679,688 $652,919 $531,705 $515,068
IRR of lease 15.09% 15.09% 4.57% 4.57%
Lease advantage over borrowing $144,639 $136,550 $193,016 $189,524
According on the table above, the Tongli leasing Option #1 is the most advantages, but
it still higher than Loan Option that offered by Tongli and the IRR from the Loan option is
more attractive than the whole of Leasing Option. Similar things are also found on Shima and
Marui Loan and Leasing option, those has above value from Tongli Loan Option.
III. Conclusion and Recommendation
III.I. Conclusion
Regarding from Wanditex Option, the whole Leasing Option has IRR value above than
its after tax cost debt. That means the leasing option are not effective cost, and Wanditex
should choose Loan Option. For the company Loan Scenario A is the best choise for
Wanditex company.
III.II. Recommendation
Wanditex company should to Invest in Automation existing plan through the Loan
Strategy.
The best Loan strategy that should be choosed is Leasing Option Scenario A. this
leasing strategy are the best strategy, and it must be giving the company more
advantages.