CORPORATE FINANCE

COURSE BINDER
ADM3350

SUMMER 2022

Professor Dev Gandhi

 MEET THE PROFESSOR

DEV. K. GANDHI

Ph.D. (Wharton), M.B.A (Wharton), M.A (Dalousie)

Dr. Gandhi is professor of finance and was formerly founding Director of the University of
Ottawa's award-winning Executive MBA Program in Ottawa and Hong Kong. He also served as
the University's Director of International Development for Executive MBA Programs. He is the
first recipient of the University's award of "honored professor" title for his contribution to the
University's School of Management.
Dr. Gandhi has conducted numerous advanced workshops in accounting, investments, financial
planning, wealth management, corporate and international finance both in Canada and abroad -
Hong Kong, Centre America, Middle East and in China (sponsored by the Canadian
International Development Agency).
Widely endorsed for nomination to the national 3M Teaching Fellowship for excellence in
teaching, Dr. Gandhi is a recipient of the best paper awards and honoraria at national and
international conferences. He is a former Associate Editor of the Journal of Banking and
Finance and coauthor of a Corporate Finance text. He has also to his credit numerous
publications in leading North American journals. His research encompasses economic feasibility
studies, export financing and promotion, public enterprise performance indicators, corporate and
international finance, foreign market entry strategies and statistical surveys. He has served as a
Vice-President of the Administrative Sciences Association of Canada, Director of Research and
Publications at the University of Calgary's Faculty of Management, Chair, Concordia's
Department of Finance and Project Leader of the annual SSHRC-funded Finance Workshops.
Dr. Gandhi has consulted widely in Canada and the U.S and has had several years of government
and industrial experience. His most recent consulting assignments have been on performance
assessment of Crown Corporation, and emerging issues in the Canadian economy in the global
context, for the Office of the Auditor General of Canada.
 TABLE OF CONTENTS

Session Topic Pages

Cost of Capital for Background Reading 10-23
Session One Capital Structure 24-79
Session Two Dividen Policy 80-107
Session Three Options, Forwards & Futures 108-142
Session Four Mergers & Acquisitions 143-188
Session Five Lease Financing 189-213
Session Six Working Capital Policy in Short-term
Financing (Classnotes)
 (i TELFER
VOTRE LIEN AVEC CE QUI COMPTE - CONNECTS YOU TO WHAT MATTERS

Corporate Finance
ADM3350
SUMMER 2022

,Prpf��oi<" < .· C Dr. Dev Gandhi, Ph.D., MBA

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Office . .·: . .
. DMS 5154
:
!�lephlme / 613 562-5800 ext. 4701
E�mail·�. _· gandhi@telfer.uottawa.ca, please e-mail me only when there
'\.•/i( )·}\
. ·:: is a significant issue
Thursday: 12:00 - 2:00 p.m.
·.•cfassLocationsi See course outline
¢I�ssHours •/ See course outline

rt()graillJ>f . · · · · Choose between the three choices below :

�(tidy •·• ·/} BCom mandatory course
· \ Mandatory course of option __AFI __or
> specialization Finance/Accounting
.• >· · . . ·•.. · / Optional course of option or specialization

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Grade·
Homework sets Assignments: Each is due a 20%
week after it is assi ned
Midterm Exams See course outline 30%
Final Exam See course outline 50%

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Course Description
The purpose of this intermediate corporate finance course is to follow up on the first introductory course
in financial management. It is intended to refine and deepen student's knowledge of the theory and
practice of financial decisions in a rapidly changing corporate and business environment. The course
material will evolve around three major problems/decisions faced by financial managers:

• Capital Structure Analysis (optimal debt/equity mixi and long-term sources of capital)
• Dividend Policy (management decisions to pay out earnings to the firm shareholders)
• Mergers and Acquisitions
• Lease Financing i
• Working Capital Management (Time Permitting)

Course Learning Objectives

By the end of the course, students will be able to use course concepts and techniques to analyze and
solve different financial decisions. The decision relates, among other things to capital structure
decisions, dividend policies, and short-term financial management as well as financial planning,
leasing and mergers and acquisitions. Students are expected to gain the skills of analyzing more
complex questions in financial management and to be able to come up with sound solutions using the
techniques and concepts covered throughout the course. A constant focus on financial decisions and
their implications on the market valuation of the firm will be maintained.

Given the objective of the course and importance of mastering financial techniques the course
approach will be lecture and practice or demonstration problems to give students the maximum chance
to understand and grasp the concepts and techniques as they are introduced in class.

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Online Course Format
This online course contains both synchronous and asynchronous activities, purposefully designed to provide
flexibility in your learning process. The course is designed in a sequential module structure in Brightspace,
with resources and complete assignment instructions to be provided for each topic and due dates noted.
Synchronous activities will be completed during the scheduled Q&A online class sessions, while
asynchronous activities can be completed online at any time once made available in Brightspace (Content
modules and discussion board).

Methods Used to Evaluate Student Performance

There will be homework assignments of numerical problems and/or self-test multiple choice quizes. Each
assignment will be due a week after it is assigned. Homework submissions of problem solutions must be
typed. Because time is the scarcest resource and managing time is part of your training, you are expected to
fully respect the due dates for all assignments, which will be marked with constructive pedagogical feedback.

The midterm and final exams will test your understanding and ability to work out solutions of corporate
finance related problems discussed in the course and answer conceptual and numerical multiple choice
questions. Please note: for students who miss the midterm exam for a justified reason, the weight of that exam
will be transferred to the final exam.

Textbook : Corporate Finance, by Ross, Westerfield, Jaffe, and Roberts (Canadian Edition), McGraw-Hill
Ryerson, In the current situation of our University's shutdown, timely purchase of the textbook may not be
possible from the University's bookstore nor will a reserve copy be available at the Management Library in
DMS.

Course Binder : A course binder specifically tailored to the course requirements has been prepared by the
professor. It comprehensively covers the corporate finance topics to be covered in the course and is expected
to be published as a corporate finance text. As such, the online video lectures by the professor will draw on
this course binder. Although made accessible to you online in absence of in-person classroom delivery of the
course, you may order the hardcopy book form of the course binder from Merriam Print, 252 Laurier Ave
East, Ottawa, Ontario, phone: 613-567-5050, email: print252@gmail.com (all of this can be googled).

The hardcopy book form is recommended because most students find it economical to own it and it is of
maximum benefit to them because it can be used any time, they are away from their computer.

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Course Schedule

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Problems on Leasing

L A business friend has offered to sell you her truck for $17,000; she will then lease the
truck back from you. The lease calls for annual lease payments over four years, payable
at the beginning of each year, with tax savings available at year end. It is expected that
the truck will have no residual value at the end of the 4 years, and CCA can be claimed at
a rate of 25 percent on a declining balance. Assume that you have other assets in the
class. Your tax rate is 30 percent, and you want Lo achieve an effective after-tax return on
your capital of 14 percent per year.
a) How high would the lease payments have to be?
b) Assume that you would finance $10,000 of the acquisition price of the truck by
bonowing from the bank at an interest rate of 11 percent. Given the lease
payments calculated under (a), what return would you then achieve on your
remaining equity investment of $7 ,000?
c) How would your answer under (a) change if the lease payments were monthly,
payable at the beginning of each month, with tax shields still available at year­
end?
2. The Lavish Carpet Manufacturing Co. has decided acquire a new machine that has an
economic life of 10 years, with no residual value. The machine can be purchased for
$75,000, and the supplier is willing to advance $45,000 of the purchase price at 12
percent. The loan is to be repaid in equal instalments over 10 years. Lavish Carpet pays
40 percent corporate income tax and can claim 20 percent capital cost allowances on the
purchased asset. It expects to negotiate a further $30,000, 10-year loan with a financial
institution at 14 percent interest, thereby financing any purchase entirely through debt.
Meanwhile, Midland Leasing Ltd. has also offered to make the equipment available
under a 10-year financial lease. Lease payments of $11,200 are to be paid at the end of
each year. How should the asset be acquired?
3. In order to buy an automated packing machine for your factory, the cost would be
0
$150,000. You have inquired at the bank about borrowing that amount and the bank
would charge you a rate of 9.5 percent on the loan. The packing machine would be used
for 10 years, at the end of which it would have no salvage value. It falls in an asset class
with an allowable CCA rate of 10 percent per year. Use of the machine would reduce
before-tax costs by $30,000 per year over its life. You also have the ability to lease the
packing machine from the manufacturer for lease payments of $25,000 per year (due at
the beginning of each year). Your firm's tax rate is 35 percent. Assuming that you will
obtain the new packing machine in some way, should you lease or buy it?
4. In order to alleviate its somewhat strained cash position, Storerite Corporation considers
signing a sale-and-leaseback arrangement with a finance company on one of its
warehouses. Under the arrangement, Storerite would sell the warehouse fnr $1,500,000
and then lease it back over a 10-ycar term for annual lease payments of $200,000. Lease
payments arc due at the beginning of each year, with tax shields available at year end.
$600,000 of the $1,500,000 selling price is deemed to be the value of the building, and
the remaining $900,000 is the value of the land. CCA on the building are tab:�n on a
declining balance at a rate of 10 percent. At the en<l of lO years, the buiiding is likely to
be worthless, but the land is expected to appreciate at the average inflation rate, which is
anticipated to be 5 percent per year. An appropriate risk-adjusted discount rate for the
V:/commno/Gandhi/Recherche/2009