Morningtea Plc has just released their annual financial statement. In financial year 2017, Morningtea treats operating l

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Morningtea Plc has just released their annual financial
statement. In financial year 2017, Morningtea treats operating
lease payment as one of the operating expenses items. It has
conventional debt of £300 million on its balance sheet with an
average maturity of 5 years and the pre-tax cost of debt is 10%. In
2017, Morningtea has generated (in its financial statement) a
revenue of 600 million and an operating income of 200 million,
after taking into account its operating lease payment at 100 mil.
Morningtea Plc also has a book value of equity of 500 million and
cash and marketable securities of 50 million. Morningtea Plc paid
12 million interest in 2017. In the notes of its financial
statement, the future planned operating lease expenses are stated
as follows: Year Commitment(£ mil) 2018 110 2019 121 2020 133.1
2021 80 2022 80 The current market value of the firm’s shares
outstanding quoted from Bloomberg terminal is 472.7 mil. After
running a regression of Morningtea Plc’s past five years’ excess
return against market risk premium, you obtain an estimated market
beta of 1.8 for Morningtea Plc. Assuming the expected market
portfolio annual return is 8% and the UK GILT annual rate at 1.5%.
The marginal tax rate is paid at 20%. Please use a straight line
method to account for the depreciation and answer the followings
questions: For the purpose of DCF valuation, you make a few
adjustments to the 2017 financial statement of Morningtea Plc.
a). What is the estimated asset value of the operating
leases?
b). What is the adjusted operating income?
c). What is the adjusted revenue to capital ratio based on
market value in year 2017?
d). Based on CAPM model, what is the cost of equity?
e). What is the adjusted debt to equity ratio based on market
value?
f). Based on the market value of equity and debt, what is cost
of capital of Morningtea Plc that should be employed to discount
its future Free cash flow from firm?
g). Based on the market value of equity and debt, what is the
hurdle rate of IRR estimation for a full equity-financed project
with equivalent risk of AfternoonT Plc?
h). Based on the market value of equity and debt, what is
discount rate that should be used to discount future Free cash flow
to equity for Morningtea Plc?
i). Explain the underlying reason of making operating lease
adjustment before deriving FCFF of Morningtea Plc.
j). Explain how R&D expenses should be treated to value a
firm/project and explain the underlying reasons.