Meanwhile, the property proposed another option that will still allow the company the use of the property. The owner is offering the property for lease with a purchase option. In your opinion, which would be a better option?
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Pierogi Corp is deciding on buying a property for expanding its operation. The acquisition cannot
be afforded with the company’s current financial situation and a highly onerous bank loan may be
required in order to make the purchase possible. Meanwhile, the property proposed another
option that will still allow the company the use of the property. The owner is offering the property
for lease with a purchase option. In your opinion, which would be a better option?
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- Lewis’s management has been considering moving to a new downtown location, and they are concerned that these plans may come to fruition prior to the equipment lease’s expiration. If the move occurs then Lewis would buy or lease an entirely new set of equipment, so management would like to include a cancelation clause in the lease contract. What effect would such a clause have on the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you were the lessor, would you insist on changing any of the other lease terms if a cancelation clause were added? Should the cancelation clause contain provisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets, or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: a. What are the possible advantages of leasing the assets instead of owning them? b. What are the possible disadvantages of leasing the assets instead of owning them? c. How will the balance sheet be different if Bradley Co. leases the assets rather than purchasing them?Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: a. What might be the advantages of leasing the assets instead of owning them? b. What might be the disadvantages of leasing the assets instead of owning them? c. In what ways will the Statement of Financial Position be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?
- Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program.After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: (a) What might be the advantages of leasing the assetsinstead of owning them?(b) What might be the disadvantages of leasing the assets instead of owning them?(c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?If a company has an option to abandon a project, would this tend to make the company more or less likely to accept the project today?Which of the following is not an example of an item that would be a contingent asset? a A possible receipt of damages that is associated with a legal claim made against another entity. b A claim by a company against the State government about some land expropriated in 1997 for which the directors are of the opinion based on previous negotiations with the government that there is a strong indication of the claim being probable in the next period. c A company has started negotiations with a potential new customer and the directors are of the opinion that it is probable that there will be a sale in future periods from these negotiations. d None of the other options; all are contingent assets. 1
- Now assume that the equipments residual value could be as low as 0 or as high as 400,000, but 200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual values increased uncertainty have on Lewis lease-versus-purchase decision?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?ell International can estimate the amount of loss that will occur if a foreign government expropriates some company property. Expropriation is considered reasonably possible. How should Bell report the loss contingency?
- Which of the following statements regarding the acquisition of PP&E is false? A. For a self constructed asset, capitalized interest can exceed actual interest cost. B. If a long-lived asset is acquired and will be paid over a number of years, the time value of money should be considered. C. The general rule of PP&E valuation is to value the asset received at the fair market value of what was given up. D. The acquisition cost of land should include all things that prepared it for it's use including excavation. In interest capitalization related to self constructed assets, all of the following must occur before the capitalization window begins except: A. Expenditures for the assets have been incurred B. Depreciation of the asset being built has been recognized C. Activities that are necessary to get the asset ready for its intended use are in progress D.Interest has to be incurredA mine operating company approaches an Islamic financial firm to obtain lease financing for some large and quite unique equipment. The financial firm is concerned it will not be able to sell the equipment at the end of the lease term. What form of financing should it propose?Bargain Wholesale Supply owns stock in Cyrus Corporation, which it intends to hold indefinitely. Should the investment in Cyrus be classified as a short-term investment? Why?
