Leasing và làm bài tập

docx

School

University of Wollongong *

*We aren’t endorsed by this school

Course

111

Subject

Finance

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by DoctorSkunk749

CHAPTER 21: LEASING Lessee: has the right to use assets and in return make periodic payments to the lessor. Lessor: is either the asset’s manufacturer or an independent leasing company. 4. THE CASH FLOW OF LEASING How to know whether we lease or buy ? 👉We’ll based directly on the cash flows of leasing Given: Company X makes a pipe-boring machine that can be purchased for $10,000. The company has determined that it needs a new machine, and the machine will save company X $6,000 dollar/year in reduced electricity for the next five year. Corporate tax = 34%. Lease payment = $2,500/years 👉 Why does depreciation bring tax benefits ? And why does lease payment bring tax benefits ? 👉Because tax is account for net income. Depreciation and lease payment deduct net income, which result in the company paying less tax. Cash flow of lessee when buying rather than leasing

If X can either borrow or lend at the interest rate of 7.5757%. And the corporate tax rate is 34%. What is the correct discount rate and NPV of the lease ?? Correct discount rate = 7.5757% * (1 - 0.34) = 5% NPV (when buying) = - $10,000 + 2,330 ( 1 + 5% ) + 2,330 ¿¿ = -$10,000 + 2,330*PVIFA(.05,5) = -$10,000 + 2,330 ∗ 1 − ¿¿ = $ 87.68 NPV (when leasing) / value of the lease = $10,000 - ( 2,330 ( 1 + 5% ) + 2,330 ¿¿ 👉 We should buy rather than lease. Cash flow of lessor when leasing rather than selling NPV = - $10,000 + 2,330 ( 1 + 5% ) + 2,330 ¿¿ ** ¿ − 10,000 + 2,330 ∗ 1 − ¿¿ 👉 We can see that the two circumstances * and ** The NPV are exactly the opposite. So it seems that there seems to be no joint benefit to this lease. Because one would inevitably lose money, one would definitely have money. So how do both companies have the same benefit ? 👉 Different in tax is the key answer . Suppose that lessor companies do not have to pay taxes. So what is its NPV ? An example: in this case, if lessee don’t pay tax and the lease payments are reduced to $2,475 from $2,500 , both lessor and lessee will find positive NPV in leasing

👉NPV of lessor when leasing = -$10,000 + 2,315.5*PVIFA(.05,5) = -$10,000 + ( 2,313.5 ( 1 + 5% ) + 2,313.5 ¿¿ 0 1 2 3 4 5 66 Buy Cost -10,000 Depreciation tax benefit (depreciation*tax) 0 0 0 0 0 0 Total -10,000 0 0 0 0 0 0 lease Payments -2,475 -2,475 -2,475 -2,475 -2,475 -2,475

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Tax benefit of lease payment (lease payment*tax) 0 0 0 0 0 0 OCF (lease - buy) 10,000 -2,475 -2,475 -2,475 -2,475 -2,475 -2,475 (Unit: $) Correct discount rate = interest*(1-tax) = 0.07575*(1-0)= 0.07575 👉NPV of lessee when leasing = $10,000 - $2,475*PVIFA(.07575, 5) = $6.35 Both lessor and lessee find the benefit of leasing ✅ How to find the amount of lease payment that both parties have benefited? 👉 Reservation payment of the lessee (lessee don’t have to pay tax) We have: NPV of lessee when leasing (Value of the lease) = $10,000 - L(max) * PVIFA(0.0757575,5) Value of the lease = 0 (lessee they wont accept if their NPV < 0 ) when: 👉👉 Meaning that the max payment that lessee could pay is ✅ $2,476.52 👉 Reservation payment of the lessor (lessor pay 34% tax) OCF -10,000 (680 + Lmin*0.66) (680 + Lmin*0.66)

NPV of lessor when leasing (Value of the lease) = -$10,000 + (680 + Lmin*0.66)*PVIFA(.05,5) The value of the lease equal zero when: 👉👉 Meaning that the min payment that lessor could accept is ✅ $2,469.32 👉👉if the lease payment range from $2,469.32 to $2,476.62 . Both parties have joint benefit (NPV of both parties > 0) ⏰ PRACTICE ⏰ Use the following information to work Problems 1–5. You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000 , and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,690,000 per year for four years. 1. Lease or Buy Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy? Year 0 Year 1 Year 2 Year 3 Year 4 Buy Cost of machine -5 800 000 Depreciation tax benefit 507 500 507 500 507 500 507 500 Total buy -5 800 000 507 500 507 500 507 500 507 500 Lease Lease payment -1 690 000 -1 690 000 -1 690 000 -1 690 000 Tax benefit of lease payment 591 500 591 500 591 500 591 500 Total lease -1 098 500 -1 098 500 -1 098 500 -1 098 500 Buy - lease (OCF) -5 800 000 1 606 000 1 606 000 1 606 000 1 606 000 Unit: $

Correct discount rate=8%*(1-tax)=5.2% NPV (buy - lease) = -5 800 000+ 1 606 000/(1+5.2%) + 1 606 000/(1+5.2%)^2 + 1 606 000/(1+5.2%)^3 + 1 606 000/(1+5.2%)^4 = -5 800 000 + 1 606 000* 1 − ¿¿ = -$131,561.25 The NPV is negative so you should lease. 2. Leasing Cash Flows What are the cash flows from the lease from the lessor’s viewpoint? Assume a 35 percent tax bracket. NPV (lessor leasing) = –$131,561.25 3. Finding the Break-Even Payment What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? 0 = - 5,800,000 + OCF * PVIFA (5.2%,4) => OCF = $1,643,274.35 OCF = Depreciation tax benefit - lease payment + tax benefit for lease payment = Depreciation tax benefit - lease payment + lease payment*tax = Depreciation tax benefit - lease payment (1 - tax) => Lease payment = (OCF - depreciation tax benefit)/(1-tax) = (1,643,274.35 - 507,500)(1-0.35) Break Even lease payment = $1,747,345.15 4. Taxes and Leasing Cash Flows Assume that your company does not contemplate paying taxes for the next several years. What are the cash flows from leasing in this case? NAL = 5,800,000 - 1,690,000*PVIFA(8%,4) = $202,505.64 5. Setting the lease payment In the previous question, over what range of lease payments will the lease be profitable for both parties? The min payment that lessor accept: 0 = -5,800,000 + Lmin * PVIFA (5.2%,4) => The max payment that lessee (you) willing to pay The max payment that lessee can pay 6. Preferred Stock and WACC The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 50,000 bonds with a coupon rate of 5.7 percent and a current price quote of 106.5%; the bonds have 20 years to maturity. 200,000 zero coupon bonds with a price quote of 17.5% and 30 years until maturity. Preferred stock: 125,000 shares of 4 percent preferred stock with a current price of $79, and a par value of $100. Common stock: 2,300,000 shares of common stock; the current price is $65, and the beta of the stock is 1.20.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent. Step 1 : calculate the cost of equity: Rs = Rf + β x (Rm - Rf) Step 2 : calculate cost of debt after tax: Rb (after tax) Step 3: Cost of preferred stock Step 4 : calculate proportion of debt and equity/preferred stock): Step 5: Calculate the WACC WACC = WACC= 0.0310. (53250/247625)+0.0354.(35000/247625)+0.0506.(9875/247625) + 0.1240. (149500/247625) = 0.0886 = 8.86% Những dạng bài trong thi: ● WACC ● Leasing ● Variance and expected return ● EBIT Practice: If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? 7. EBIT and Leverage

Music City, Inc., has no debt outstanding and a total market value of $295,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering an $88,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enters a recession. b. Repeat part (a) assuming that the company goes through with recapitalization. What do you observe? a) b)

8. Franklin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 315,000 shares of stock outstanding. Under Plan II, there would be 225,000 shares of stock outstanding and $4.14 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. a. If EBIT is $750,000, which plan will result in the higher EPS? b. If EBIT is $1,750,000, which plan will result in the higher EPS? c. What is the break-even EBIT? a. Plan 1 Plan 2 EPS = 750,000/315,000 = 2.38 Interest rate = 10%*4,140,000 = 414,000 NI = 750,000 - 414,000 = 336,000 EPS = 336,000/225,000=1.49 b. Under Plan I , the net income is $1,750,000 and the EPS is: EPS = $1,750,000 / 315,000= $5.56 Under Plan II , the net income is: NI = $1,750,000 – .10($4,140,000)= $1,336,000 And the EPS is: EPS = $1,336,000 / 225,000 shares EPS = $5.94 c To find the breakeven EBIT for two different capital structures, we set the equations for EPS equal to each other and solve for EBIT. The breakeven EBIT is: EBIT / 315,000 = [EBIT – .10($4,140,000)] / 225,000 EBIT = $1,449,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version