Am. 131. insurance, and operating expenses. IT Greymare does not own the bus, it cannot depreciate it, and therefore, it gives up a valuabledepreciation tax shield. We assume depreciation would be calculated immediately. All payments are in advance, that is, at the start ofeach year. Greymare's borrowing rate is 9%. Assume this is a financial lease.a. What is the value of the lease if Greymare's marginal tax rate is T = 0.30?b. What would the lease value be if the tax rate is 21%, but for tax purposes, the initial investment had to be written off in equalamounts over years 1 through 5?Note: For all requirements, a negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enteryour answers in thousands rounded to 2 decimal places.Answer is complete but not entirely correct.a. Value of thelease$6,669.29 thousandsb. Value of thelease$5,094.91 thousands

Question: Calculating the Lease Value:a. Marginal Tax Rate of T = 0.307: Step 1: Calculate present…

Answered: insurance, and operating expenses. IT…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 7MC: (1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also...

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Similar questions

Lease versus Buy Consider the data in Problem 19-1. Assume that RCs tax rate is 40% and that the equipments depreciation would be 100 per year. If the company leased the asset on a 2-year lease, the payment would be 110 at the beginning of each year. If RC borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should RC lease or buy the equipment?
Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?
(1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also in the 25% tax bracket, and that it also forecasts a 200,000 residual value. Also, to furnish the maintenance support, it would have to purchase a maintenance contract from the manufacturer at the same 20,000 annual cost, again paid in advance. Consolidated Leasing can obtain an expected 10% pre-tax return on investments of similar risk. What are its NPV and IRR of leasing under these conditions? (2) What do you think the lessors NPV would be if the lease payment were set at 260,000 per year? (Hint: The lessors cash flows would be a mirror image of the lessees cash flows.)
Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment?
Pele Corp. is a professional leasing company. The leasing manager has to evaluate some lease agreements under the following conditions: • The company’s marginal federal-plus-state income tax rate is 30%. • The company has alternative investment options of similar risk that yield 5.50%. Assuming all other factors and values are constant among these leases, from the lessor’s perspective, which of the following is the best lease? A lease that generates an after-tax rate of return of 2.75%. A lease that has an NPV of –$120,000. A lease that has an IRR of 3.05%. A lease that has an MIRR of 4.45%.
An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The corporate tax rate is 32 percent, and the cost of borrowing is 8 percent. What lease payment amount will make the lessee and the lessor equally well off? Without excel preferably
Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carryforwards, so Quartz’s effective tax rate is zero. Quartz plans to lease equipment from New Leasing Company. The term of the lease is four years. The purchase cost of the equipment is $925,000. New Leasing Company is in the 22 percent tax bracket. There are no transaction costs to the lease. Each firm can borrow at 7 percent. a. What is Quartz’s reservation price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is New Leasing Company’s reservation price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 8.5%. The cars will be used for four years. At the end of four years they will be worthless. The corporate tax rate is 34%. The cars belong in CCA class 10 (a 30% class). What is the break-even lease payment? Select one: a. $47,328 b. $57,705 c. $35,675 d. $55,000 e. $56,128
A company is thinking to sell an asset since it will be replaced by a higher capacity one. The estimated sale price of the asset is $300,000 while the asset has depreciated to the salvage value of $500,000. If the company has the marginal tax rate of 35%, what is the tax implication of the sale of this asset? Round to the nearest penny. If tax llabilities, type a negative sign in front. Do not include a dollar sign in your answer. (I. e. If your answer is tax liabilites of 58, 765, 43, type-8765.43; if tax shield of S8, 76543 type 8765.43).
Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year. i) What is the maximum lease payment that would be acceptable to Firm A? ii) Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?
An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The corporate tax rate is 32 percent, and the cost of borrowing is 8 percent. What lease payment amount will make the lessee and the lessor equally well off?
Based on last year’s Statement of Comprehensive Income, the company’s marginal tax rate was 35%. Before making the decision to buy or lease, Richard would like to carefully weigh the pros and cons of leasing versus borrowing and buying. However, the decision must be made soon, as the old refrigeration units are “on their last legs”! Questions: Explain the tax effects on the cash flows relevant to the lease versus buy decision. What is the correct discount rate to use in calculating the present value of the relevant cash flows in a lease versus buy decision? Explain. Calculate the Net Advantage to Leasing (NAL) of the new refrigeration units. Assume that the maintenance costs are paid at the end of each year. What is the maximum lease payment that Richard should pay?

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