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Question Cristiano Limited is interested in acquiring the use of a generator costing Rs. 800,000/-. It has two 

options:

1) To borrow the amount at18% per annum repayment in 5 equal annual installment at the end of 

each year

OR

2) To take on lease the asset for a period of 5 years at the end of each year of Rs. 175,000/-

The corporation tax rate is 35% and the depreciation is allowed on straight line method. The asset will 

have a salvage value of Rs. 180,000 at the end of the 5th year.

Required:

You are required to evaluate each source of financing and advice the company about lease or buy 

decision.

(a) Why companies opt for equity fund rather than debt financing?

(b) How shareholder wealth can be maximized? What are the reasons of it?

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