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Morris-Meyer Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the required amount. Alternatively, a Nevada investment banking from that represents a group of investors believes that it can arrange for a lease financing plan. Assume that the following facts apply: The equipment falls in the MACRS 3-year class. The applicable MACRS rates are 34%, 45%, 12%, and 7%. Estimated maintenance expenses are $75,000 per year. Morris-Meyer's federal-plus-state tax rate is 40%. If the money is borrowed, the bank loan will be at a rate of 17%, amortized in 4 equal installments to be paid at the end of each year. The tentative lease terms call for end-of-year payments of $250,000 per year for 4 year. Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. The equipment has an estimated salvage value of $250,000, which is the expected market value after 4 years, at which time Morris-Meyer plans to replace the equipment regardless of whether the firm leases or purchases it. The best estimate for the salvage value is $250,000, but it may be much higher or lower under certain circumstances. To assist management in marking the proper lease-versus-buy decision, you are asked to answer the following questions. Assuming that the lease can be arranged, should Morris-Meyer lease or borrow and buy the equipment? Explain. Round your answer to the whole number. Net advantage to leasing (NAL) is
The growth of mature companies is primarily funded by: A. issuing new shares of stock B. Issuing new debt securities C. Reinvesting company earnings D. Increasing accounts payable
Jeff currently earns $3000 per month. He has an individual disability-income policy that will pay $2000 monthly if he is totally disabled. Disability is defined in terms of the worker's own occupation. The policy has a 30-day elimination period a..
A stock had returns of 4 percent, 11 percent, 16 percent, -6 percent, and -2 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year?
Twice Shy Industries has a debt−equity ratio of 1.4. Its WACC is 9.4 percent, and its cost of debt is 6.7 percent. The corporate tax rate is 35 percent. What is the company’s cost of equity capital? What is the company’s unlevered cost of equity capi..
An investment offers $5,800 per year for 20 years, with the first payment occurring one year from now. If the required return is 7 percent, what is the value of the investment? What would the value be if the payments occurred for 45 years? What would..
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.76 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. What is the maximum initial cost the co..
Explain carefully why a distribution with a heavier left tail and less heavy right tail than the lognormal distribution gives rise to a downward sloping volatility smile.
Last week, Lester's Electronics paid an annual dividend of $2.75 on its common stock. The company has a longstanding policy of increasing its dividends by 3% annually. This policy is expected to continue. What is the firm's cost of equity if the stoc..
An unlevered firm has a cost of capital of 16.7 percent and earnings before interest and taxes of $489,602. A levered firm with the same operations and assets has face value of debt of $650,000 with a coupon rate of 7.5 percent that sells at par. The..
"Determinants of Trade Flows and Financing International Trade" Please respond to the following: Analyze the major effects that microeconomic and macroeconomic factors could have on the international flow of funds between countries and the primary ma..
Many times students will discuss how U.S government bonds are backed by the full faith and creit of the U.S government. Generally government bonds have always been assumed to not have any risk. Therefore, even though these bonds have been thought to ..
The 2014 balance sheet of Sugarpova’s Tennis Shop, Inc., showed $520,000 in the common stock account and $5.5 million in the additional paid-in surplus account. The 2015 balance sheet showed $560,000 and $5.7 million in the same two accounts, respect..
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