Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 25, Problem 13PS
Taxes and leasing Look again at the bus lease described in Table 25.2.
- a. What is the value of the lease if Greymare’s marginal tax rate is Tc = .20?
- b. What would the lease value be if, for tax purposes, the initial investment had to be written off in equal amounts over years 1 through 5?
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Suppose that National Waferonics has before it a proposal for a four-year financial lease.
Year 0
Year 1
Year 2
Year 3
Lease cash flow
+59,200
−27,900
−23,300
−18,700
These flows reflect the cost of the machine, depreciation tax shields, and the after-tax lease payments. Ignore salvage value. Assume the firm could borrow at 14% and faces a 21% marginal tax rate.
a. What is the value of the equivalent loan?
b. What is the value of the lease?
Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.
The total after-tax cash outflow for:
leasing = $70,700.00 ; purchase = $61,702.19
The present value of after-tax outflows, using after-tax cost of debt:
leasing = $61,139.76 ; purchase = $53,212.40.
Which alternative-lease or purchase would you recommend? Justify.
Chapter 25 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Operating leases Acme has branched out to rentals...Ch. 25 - Prob. 9PSCh. 25 - Prob. 10PSCh. 25 - Technological change and operating leases Look at...
Ch. 25 - Prob. 12PSCh. 25 - Taxes and leasing Look again at the bus lease...Ch. 25 - Taxes and leasing In Section 25-4 we showed that...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Prob. 18PSCh. 25 - Valuing leases The Safety Razor Company has a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 22PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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