Financing PPL Corporations Growth Strategy

Mondays lecture (October 28, 2002) will go over some of the issues associated with the relation between
investment 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 to
comlete your analysis for that class! $%hibits &, 2, ', (, and ) are available in an $%cel sreadsheet on the
website (if you downloaded the sreadsheet before 8*00m +riday, , added $%hibit ) then)!
-his case concerns financing large investments in caital assets in a short eriod of time for strategic
reasons! .ccording to Modigliani and Miller, with efficient mar/ets and no cororate ta%ation, firms
should be able to raise all funds necessary to finance ositive net resent value ro0ects and, further, the
firms caital structure (or off-balance financing structures) should not affect the firms weighted-average
cost of caital (1.22) or the availability of credit! -his case is articularly interesting because the
synthetic leases that are the focus of the case, resulting in secial-urose entities (3"$s) and off-balance
sheet financing, are e%actly those financing techni#ues which got $nron and other firms into so much
trouble recently! .fter achieving a basic command of the facts of the case, , strongly recommend reading
case .endi% & and studying case .endi% 2 covering the ta% and accounting asects of leasing! 4oss,
1esterfield, and 5affe, Corporate Finance, 2hater 2&, rovides an overview of leasing and could rovide
a reference for lease-related terms but , thin/ the case aendices should be enough information for most
students!
-he issue facing management concerns the advantages and disadvantages of financing 6& billion in
electricity generating lants with traditional or limited recourse synthetic lease structures and your team
should ma/e a recommendation on the best choice! -he following #uestions are rovided as guidance in
develoing your grous osition on this issue but should not be ta/en as an outline or suggestion for the
secifics of your one-age memo!
(&) 1hat deartures from Modigliani and Miller and efficient mar/et theories result in the attractiveness of
synthetic leases to cororations, secifically ""7 in this case (they are widely used by many cororations)8
9ow do these deartures from finance theory e%lain the tradeoffs determining the desirability of different
forms of off-balance sheet financing8
(2) 1hat arties are involved in the financing involved in a synthetic lease and what determines their
differing e%ected ris/s and returns8 2an you calculate or estimate the costs of the two tyes of synthetic
leases from data rovided in $%hibit : so that you can assess the net benefits of a limited recourse synthetic
lease8 ,n any case, what are all the factors that will determine the relative attractiveness of different lease
structures for ""78
(') 1hat business considerations are driving the raid e%ansion in generating caacity and how do timing
issues interact with the financing decision8 1hy is timing a concern in arranging the synthetic lease
financing in the resent case and how do the different lease structures relate to cost and timing issues8