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Penn Medical Center, a for-profit hospital, is considering the purchase of a new 64-slice CT scanner. The cost of the new scanner is $4 million and will be depreciated over 10 years on a straight line basis to $0 savage value. The tax rate is 40%. The financing options include either borrowing the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $950,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5%. The after-tax cost of debt is 3%. Should Penn Medical lease the equipment or borrow the money?
You are considering an investment in a mutual fund with a 4% front-end load and an expense ratio of 0.65%. You can invest instead in a bank CD paying 6% interest. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.90% per..
The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73. What is the current value?
Pinkon Communications is trying to estimate first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: The company faces a 40 percent tax rate. What is the project’s operating cash f..
You have just taken out a $22,000 car loan with a 6% APR, compounded monthly. The loan is for five years. When you make your first payment in one month, how much of the payment will go toward the principal of the loan and how much will go toward inte..
Calculate Touring Enterprises' weighted average cost of capital (WACC). Work as follows: first, compute the after-tax cost of debt, then compute the cost of equity. Cite both formulas, and show all your work.
A year ago, you purchased 200 shares of ABC, Inc. for $25.50 on margin. At that time the margin requirement was 40 percent. If the interest rate on the borrowed funds was 9 percent and you sold the stock for $34, what is the percentage return on th..
Oriole Industries has $10 million in outstanding bonds that are selling for 99 percent of par value. The bonds pay an annual coupon of 9 percent and mature in 10 years. What is Oriole Industries' pre-tax component cost of debt?
Suppose that Lily Mac Photography expects EBIT to be approximately $200,000 per year for the foreseeable future, and that it has 1,000 10-years, 9 percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculat..
A firm desires a WACC of 8.4%. It's cost of equity is 11.2% and it's pre tax cost of debt is 7.1%. The firm does not issue preferred stock. Tax rate is 38%. What must the debt-equity ratio of the firm be if it is to achieve it's target WACC?
The Operations Analyst for a company is studying the inventory stocking policy for a product (#A123). His records show that the demand per day is normally distributed with a mean of 210 and a standard deviation of demand of 5. Lead time is 4 days. Th..
A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $100,000 and it will be depreciated on a straight-line basis down to $0. The firm’s tax rate is 35 percent and the required..
An investment pays $2,600 per year for the first 4 years, $5,200 per year for the next 6 years, and $7,800 per year the following 7 years (all payments are at the end of each year). If the discount rate is 10.25% compounding quarterly, what is the fa..
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