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Preston Corporation is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $110,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $28,600 for the first two years, and the other with payments of $50,600 for the last two years. In your analysis, round all values to the nearest dollar. a. Compute the aftertax cost of the leases for the four years. b. Compute the annual payment for the loan (round to the nearest dollar). c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.) d. Determine the depreciation schedule (see Table 12-9). e. Compute the after tax cost of the borrow-purchase alternative. f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent. g. Which alternative should be selected, based on minimizing the present value of aftertax costs?
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $4000 per year. If he can get a five-year loan with an annual interest rate of 7.5%, what is the maximum price he can afford to buy a car?
Southern Mfg., Inc., is currently operating at only 86 percent of fixed asset capacity. Current sales are $620,000. How fast can sales grow before any new fixed assets are needed?
Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. What is the yield to maturity at a current market price of $834?
The developer of a new mobile video game needs $50 million in financing for advertising and software programming. What would be the proper debt to equity mix and where would it find this financing. What kind of dilution or floatation costs would be l..
Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 9% of its $100 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually. What is the value of Rolen's preferred stock?
Determine the short run profit-maximizing price
Last year, you purchased a stock at a price of $82.00 a share. Over the course of the year, you received $3.30 in dividends and inflation averaged 2.7 percent. Today, you sold your shares for $86.70 a share. What is your approximate real rate of retu..
Consider an asset that costs $465,000 and is depreciated straight-line to zero over its six-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $120,000. If the relevant tax rate is 35 p..
Explain the difference between a bull market and a bear market. Discuss the frequency with which returns as bad as those during 2007-2009 occur. How would you characterize the current state of the stock market?
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What is the matching principle of working capital financing? What are the benefits of following this principle?
Evaluate project that costs $1.5 million has a 10-year life and no salvage value. Assume depreciation is straight line over the life of the project. Sales are projected at 150K units every year over the life of the project. Price per unit is $75, var..
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