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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Chapter 25, Problem 8PS
Operating leases Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,000 desk. Desks last for six years and can be
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Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year.
What is the break-even rate in this case?
Harmeling Paint Ball (HPB) Corporation needs a new air compressor that costs $90,000. HPB will need it for only 3 years even though the compressor's economic life is long enough so that the lease is an operating lease. The firm can lease the compressor for 3 years with $10,000 lease payments at the end of each year. HPB's cost of debt is 10%. Answer the following questions. (Hint: See Table 19-1.)
What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.
$
What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.
$
What will HPB report as the Year-1 lease expense? Round your answer to the nearest cent. Enter your answer as a positive value.
$
Kuehner estimates that it can lease Parker Road Plaza for $18.50 per square foot (GLA) base rent with a 3 percent overage on gross sales in excess of $200 per square foot (GLA). The company expects rents to increase by 5 percent per year during the lease period and tenant reimbursements to run $8 per square foot (GLA) and to increase at the same rate as rents. Kuehner expects to have the shopping center 70 percent leased during the first year of operation After that, vacancies should average about 5 percent per year. The vacancy losses should be cal-culated on the entire gross potential income, which includes minimum rents, percentage rents and tenant reimbursements. Sales, which are expected to average $210 per square foot (GLA) for the first year of operation, should grow at 6 percent per year. The operating expenses are expected to average $14 per square foot of GLA for the first year and will increase at the same rate as the rents. Kuehner will collect an additional 5 percent of…
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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- 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?arrow_forwardOwens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?arrow_forwardParagon Leasing has been approached by Mid-America Trucking Company (MATC) to provide lease financing for a fleet of new tractors. Each tractor will cost $140,000 and will be leased by MATC for 7 years with lease payments made at the beginning of each year. Paragon will depreciate the tractors on a straight-line basis to $0 but the actual market value at the end of 7 years is estimated to be $25,000. What are the required annual beginning-of-year lease payments if Paragon desires to earn a 14% after-tax rate of return? Assume a marginal tax rate of 40%.arrow_forward
- Harmeling Paint Ball (HPB) Corporation needs a new air compressor that costs $90,000. HPB will need it for only 3 years even though the compressor's economic life is long enough so that the lease is an operating lease. The firm can lease the compressor for 3 years with $10,000 lease payments at the end of each year. HPB's cost of debt is 10%. Answer the following questions. (Hint: See Table 19-1.) What is the Year-1 imputed interest expense? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What lease liability must be reported at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What right-of-use asset must be reported at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. $ $arrow_forwardCanton Corp. produces a part using an expensive proprietary machine that can only be leased. The leasing company offers two contracts. The first (unit-rate lease) is one where Canton would pay $4 per unit produced, regardless of the number of units. The second lease option (flat-rate lease) is one where Canton would pay $60,000 per month, regardless of the number produced. The lease will run one year and the lease option chosen cannot be changed during the lease. All other lease terms are the same. The part sells for $40 per unit and unit variable cost (excluding any machine lease costs) are $20. Monthly fixed costs (excluding any machine lease costs) are $200,000. Required: a. What is the monthly break-even level assuming: 1. The unit-rate lease? 2. The flat-rate lease? b. At what volume would the operating profit be the same regardless of the lease option chosen? c. Assume monthly volume of 20,000 units. What is the operating leverage assuming: 1. The unit-rate lease? 2. The…arrow_forwardCompanies that have a high demand for making copies, both color and black and white, often choose to lease a high-end copier that provides fast and reliable service at a reasonable cost. The lease is usually for 3 to 5 years, and the cost to the user is $0.19 per page for black-and-white copies and typically $0.265 per page for color copies. These are the terms of your current 3-year lease contract with Ricoh Company, which is up for renewal this month; the lease terms are expected to be the same for the next 3 years, if renewed. Hewlett-Packard Company (HP) developed an innovative copier that can reduce the cost of color copies. The copier measures exactly how much color is used in a color copy so that the price of the copy can be determined by the amount of color used rather than a fixed price per page. The cost could be as low as $0.251 per page for a color copy. HP calls this a “flexible-pricing” approach. Assume for this example that the cost of the leased copier (3-year lease)…arrow_forward
- Companies that have a high demand for making copies, both color and black and white, often choose to lease a high-end copier that provides fast and reliable service at a reasonable cost. The lease is usually for 3 to 5 years, and the cost to the user is $0.12 per page for black-and-white copies and typically $0.175 per page for color copies. These are the terms of your current 3-year lease contract with Ricoh Company, which is up for renewal this month; the lease terms are expected to be the same for the next 3 years, if renewed. Hewlett-Packard Company (HP) developed an innovative copier that can reduce the cost of color copies. The copier measures exactly how much color is used in a color copy so that the price of the copy can be determined by the amount of color used rather than a fixed price per page. The cost could be as low as $0.130 per page for a color copy. HP calls this a “flexible-pricing” approach. Assume for this example that the cost of the leased copier (3-year lease)…arrow_forwardHarmeling Paint Ball (HPB) Corporation needs a new air compressor that costs $80,000. HPB will need it for only 5 years even though the compressor's economic life is long enough so that the lease is an operating lease. The firm can lease the compressor for 5 years with $40,000 lease payments at the end of each year. HPB's cost of debt is 11%. Answer the following questions.arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 10% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your…arrow_forward
- Task: evaluate the payoffs from buying the asset versus using it on a lease arrangement. Given: The equipment costs €2000 000 Interest rate on debt 8%. Depreciation MARCS (Modified Accelerated Cost Recovery Sys): 35% first year; 40% second year, 15% third year; and 10% fourth year. Marginal tax rate = 30%. If the firms buys the equipment, there is a four year maintenance cost of €30 000 payable at the beginning of each year. If the equipment is leased: Firm could obtain a 4-year lease which includes maintenance. Rental payment would be €500,000 at the beginning of each year. Residual (salvage) value at t = 4: €200,000.arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What will RC report as an amortization expense at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What will RC report as the lease liability at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What will RC report as the right-of-use asset at Year 1? Do…arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. $ What will RC report as an interest expense at Year 1? Round your answer to the nearest cent.…arrow_forward
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