Reference no: EM132966311
Questions -
Q1. Beta Corporation is considering a 3-d printer that can be leased for $5,000 a year for 8 years. The company's marginal tax rate is 27 percent and the yield to maturity on the company's debt is 6.5 percent. Compute the cost to lease if lease payments and associated tax savings are at the
a. beginning of each year.
b. end of each year.
c. the payments are at the beginning of the year and the tax benefits are spread across the year.
Q2. You want a new automobile for personal use. Neither depreciation nor interest payments will be tax deductible. You can buy the automobile with a $2,000 down payment and a 7 percent, forty-eight-month loan. The monthly payments will be $665. Alternately, you can lease the automobile with; a $3200 NON -refundable deposit, a $1600 refundable security deposit and lease payments of $517 at the beginning of each month for 48 months. Using a 7 percent annual required return to evaluate the salvage value, what must the car be worth at the end of 48 months for the purchase to be more attractive than the lease? What is the indifference point?
Q3. You are evaluating a target company and this target company generates free cash flows of $2,000,000 a year. This $2,000,000 is free cash flow available to both the debtholders and the stockholders. No growth is expected and the $2,000,000 is considered perpetual in nature. Additionally, you believe the optimal financing for this acquisition is 60 percent debt and 40 percent equity. You estimate the after-tax cost of debt to be 5% and the after-tax cost of equity to be 8%. What is your estimate of the value for this target company?
Q4. Tom Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $4,150,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,000,000. This will increase free cash flow to $5,000,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 7%.
a. What is the value of Jerry Corporation without a merger?
b. What is the value of Jerry Corporation with the merger?