Quartz Corporation is a relatively new firm. Quartz has experienced enough losses.during its early years to provide it with at least eight years of tax loss carryforwards,so Quartz's effective tax rate is zero. Quartz plans to lease equipment from New LeasingCompany. The term of the lease is four years. The purchase cost of the equipment is$955,000. New Leasing Company is in the 24 percent tax bracket. There are notransaction costs to the lease. Each firm can borrow at 7 percent.a. What is Quartz's reservation price? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)b. What is New Leasing Company's reservation price? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g., 32.16.)a.Reservation priceb. Reservation price

Lease payments:Lease payments are a type of payment made by a lessee to a lessor for the use of an…

Answered: Quartz Corporation is a relatively new…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Based on last year’s Statement of Comprehensive Income, the company’s marginal tax rate was 35%. Before making the decision to buy or lease, Richard would like to carefully weigh the pros and cons of leasing versus borrowing and buying. However, the decision must be made soon, as the old refrigeration units are “on their last legs”! What factors, aside from the NAL, must Richard consider before making the lease versus buy decision? 2) Should Richard lease or buy the refrigeration units?
Comey Products has decided to acquire some new equipment having a $240,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.
Bunsen Company is involved in a consumer liability lawsuit. Company attorneys have assessed the contingent outcomes of the lawsuit. Because the attorneys think the company will probably lose the lawsuit, To prepare for this loss, Bunsen management has decided to set aside funds in an investment account that earns a 9% return rate. Furthermore, there is general agreement that there is a 60% probability the company will have to pay the defendants $6 million four years from now; a 30% probability the company will need to pay $10 million eight years from now, and a 10% probability the company will pay nothing. What amount should Bunsen accrue as a contingent liability?
Spherical Manufacturing recently spent $19 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 45% and Spherical's marginal corporate tax rate is 28%. a. What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 10% per year? d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 10% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years?
An asset costs $420,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent, and the lessee can borrow at 10 percent. The corporate tax rate is 34 percent for both companies. Assume the lease payments are made at the end of each year. (Do not round intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.) a. This part of the question is not part of your Connect assignment. b. What lease payment amount will make the lessee and the lessor equally well off? Lease payments $ c. Assume that the lessee pays no taxes and the lessor is in the 34 percent tax bracket. For what range of lease payments does the lease have a positive NPV for both parties? Range more than $ Tibut less than $
Spherical Manufacturing recently spent $18 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 45% and Spherical's marginal corporate tax rate is 39%. a. What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 12% per year? d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 12% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years? CHOD a. What are the annual CCA deductions associated with this equipment for the first five years? The CCA deduction for year 1 is $ 4,050,000. (Round to the nearest dollar) The CCA deduction for year 2 is $. (Round…

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