Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 20, Problem 13IC
FISH & CHIPS INC, PART I
LEASE ANALYSIS Martha Millon,
If the computer is purchased, a maintenance contract must be obtained at a cost of $25,000, payable at the beginning of each year. After 4 years, the computer will be sold. Millon′s best estimate of its residual value at that time is $125,000. Because technology is changing rapidly however, the residual value is uncertain.
As an alternative. National Leasing is willing to write a 4-year lease on the computer, including maintenance, for payments of $340,000 at the beginning of each year. Fish 4c Chips′s marginal federal-plus-state tax rate is 40%. Help Millon conduct her analysis by answering the following questions.
a. 1. Why is leasing sometimes referred to as "off-balance-sheet" financing?
2. What is the difference between a capital lease and an operating lease?
3. What effect does leasing have on a firm′s capital structure?
b. 1. What is Fish & Chips's
2. Explain the rationale for the discount rate you used to find the PV.
c. 1. What is Fish & Chips′s present value cost of leasing the computer? (Hint: Again, construct a time line.)
2. What is the net advantage to leasing? Does your analysis indicate that the firm should buy or lease the computer? Explain.
d. Now assume that Millon believes that the computer′s residual value could be as low as $0 or as high as $250,000, but she stands by $125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision?
e. Millon knows that her firm has been considering moving its headquarters to a new location, and she is concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs, the company would obtain new computers; hence, Millon would like to include a cancellation clause in the lease contract. What effect would a cancellation clause have on the risk of the lease?
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Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a machine:
Lease Alternative
Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the beginning of each year. All maintenance costs will be borne by the lessor and the insurance and other costs will be borne by the lessee.
“Borrowing to Buy” Alternative
The machine costs RM20,000 and will have a 5-year life. The purchase will be financed by a 5year, 15% interest. Seroja will pay RM1,000 per year for a service contract that covers insurance and other costs.
Seroja Berhad plans to keep the machine and use it beyond its 5-year life.
The machine will be depreciated as given below:
Year
Depreciation
RM
1
5,000
2
4,000
3
3,000
4
2,000
5
1,000
Given that the corporate tax rate is 30%.
Prepare the Cash Flows Analysis by clearly showing the Net Advantage of Leasing (NAL).…
Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a machine:
Lease Alternative
Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the beginning of each year. All maintenance costs will be borne by the lessor and the insurance and other costs will be borne by the lessee.
“Borrowing to Buy” Alternative
The machine costs RM20,000 and will have a 5-year life. The purchase will be financed by a 5year, 15% interest. Seroja will pay RM1,000 per year for a service contract that covers insurance and other costs.
Seroja Berhad plans to keep the machine and use it beyond its 5-year life.
The machine will be depreciated as given below:
Year
Depreciation
RM
1
5,000
2
4,000
3
3,000
4
2,000
5
1,000
Given that the corporate tax rate is 30%.
From the above information you are required to answer the following questions.
Give explanation to Seroja on ONE (1) benefit of…
Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a machine:
Lease Alternative
Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the beginning of each year. All maintenance costs will be borne by the lessor and the insurance and other costs will be borne by the lessee.
“Borrowing to Buy” Alternative
The machine costs RM20,000 and will have a 5-year life. The purchase will be financed by a 5year, 15% interest. Seroja will pay RM1,000 per year for a service contract that covers insurance and other costs.
Seroja Berhad plans to keep the machine and use it beyond its 5-year life.
The machine will be depreciated as given below:
Year
Depreciation
RM
1
5,000
2
4,000
3
3,000
4
2,000
5
1,000
Given that the corporate tax rate is 30%.
From the above information you are required to answer the following questions.
Give explanation to Seroja on ONE (1) benefit of…
Chapter 20 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 20 - Prob. 1QCh. 20 - You are told that one corporation just issued SI00...Ch. 20 - One often finds that a companys bonds have a...Ch. 20 - Prob. 4QCh. 20 - Distinguish between operating leases and financial...Ch. 20 - One alleged advantage of leasing voiced in the...Ch. 20 - Prob. 7QCh. 20 - Prob. 8QCh. 20 - Prob. 9QCh. 20 - Prob. 10Q
Ch. 20 - Evaluate the following statement: Issuing...Ch. 20 - Suppose a company simultaneously Issues 50 million...Ch. 20 - LEASING Connors Construction needs a piece of...Ch. 20 - WARRANTS Gregg Company recently issued two types...Ch. 20 - CONVERTIBLES Petersen Securities recently issued...Ch. 20 - BALANCE SHEET EFFECTS OF LEASING Two textile...Ch. 20 - Prob. 5PCh. 20 - Prob. 6PCh. 20 - CONVERTIBLES In the summer of 2015, the Hadaway...Ch. 20 - LEASE ANALYSIS As part of its overall plant...Ch. 20 - Prob. 12SPCh. 20 - FISH CHIPS INC, PART I LEASE ANALYSIS Martha...Ch. 20 - Prob. 14IC
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