8/10/2019 pplgrowth case study

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Financing PPL Corporations Growth Strategy

Mondays lecture (October 28, 2002) will go over some of the issues associated with the relation betweeninvestment and financing decisions, and discuss leasing, off-balance sheet financing, and synthetic leases,and will review finance terms imortant in this case! "reare any #uestions you may need answered tocomlete your analysis for that class! $%hibits &, 2, ', , and are available in an $%cel sreadsheet on thewebsite (if you downloaded the sreadsheet before 8*00m +riday, added $%hibit then)!

his case concerns financing large investments in caital assets in a short eriod of time for strategicreasons! .ccording to Modigliani and Miller, with efficient mar/ets and no cororate ta%ation, firmsshould be able to raise all funds necessary to finance ositive net resent value roects and, further, thefirms caital structure (or off-balance financing structures) should not affect the firms weighted-averagecost of caital (1.) or the availability of credit! his case is articularly interesting because thesynthetic leases that are the focus of the case, resulting in secial-urose entities (3"$s) and off-balancesheet financing, are e%actly those financing techni#ues which got $nron and other firms into so muchtrouble recently! .fter achieving a basic command of the facts of the case, strongly recommend readingcase .endi% & and studying case .endi% 2 covering the ta% and accounting asects of leasing! 4oss,1esterfield, and 5affe, Corporate Finance,hater 2&, rovides an overview of leasing and could rovidea reference for lease-related terms but thin/ the case aendices should be enough information for moststudents!

he issue facing management concerns the advantages and disadvantages of financing 6& billion inelectricity generating lants with traditional or limited recourse synthetic lease structures and your teamshould ma/e a recommendation on the best choice! he following #uestions are rovided as guidance indeveloing your grous osition on this issue but should not be ta/en as an outline or suggestion for thesecifics of your one-age memo!

(&) 1hat deartures from Modigliani and Miller and efficient mar/et theories result in the attractiveness ofsynthetic leases to cororations, secifically ""7 in this case (they are widely used by many cororations)9ow do these deartures from finance theory e%lain the tradeoffs determining the desirability of differentforms of off-balance sheet financing

(2) 1hat arties are involved in the financing involved in a synthetic lease and what determines their

differing e%ected ris/s and returns an you calculate or estimate the costs of the two tyes of syntheticleases from data rovided in $%hibit : so that you can assess the net benefits of a limited recourse syntheticlease n any case, what are all the factors that will determine the relative attractiveness of different leasestructures for ""7

(') 1hat business considerations are driving the raid e%ansion in generating caacity and how do timingissues interact with the financing decision 1hy is timing a concern in arranging the synthetic leasefinancing in the resent case and how do the different lease structures relate to cost and timing issues