Problem 26-12 Valuing financial leasesImagine yourself in the position of Thomas Pierce III, president of Greymare Bus Lines. Your firm was established by yourgrandfather, who was quick to capitalize on the growing demand for transportation between Widdicombe and nearbytownships. The company has owned all its vehicles from the time the company was formed; you are now reconsidering thatpolicy. Your operating manager wants to buy a new bus costing $94,000. The bus will last only eight years before going to thescrap yard. You are convinced that investment in the additional equipment is worthwhile. However, the representative of thebus manufacturer has pointed out that her firm would also be willing to lease the bus to you for eight annual payments of$16,300 each. Greymare would remain responsible for all maintenance, insurance, and operating expenses. If Greymare doesnot own the bus it cannot depreciate it and therefore, it gives up a valuable depreciation tax shield. We assume depreciationwould be calculated immediately. Greymare's borrowing rate is 11%. Assume this is a financial lease.a. What is the value of the lease if Greymare's marginal tax rate is Tc = 0.30?Cb. What would the lease value be if the tax rate is 21%, but for tax purposes, the initial investment had to be written off inequal amounts over years 1 through 5?Note: For all requirements, a negative answer should be indicated by a minus sign. Do not round intermediatecalculations. Enter your answers in thousands rounded to 2 decimal places.X Answer is complete but not entirely correct.a. Value of theleaseb. Value of thelease$(46.89)(58.53)thousandsthousands

Lease payments are regular, often monthly, fees paid for the right to use a property, asset, or…

a. What is the value of the lease if Greymare's marginal tax rate is Tc = 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 equal amounts over years 1 through 5?

a. What is the value of the lease if Greymare's marginal tax rate is Tc = 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 equal amounts over years 1 through 5?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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