Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 21, Problem 3MC
DECISION TO LEASE OR BUY AT WARF COMPUTERS
Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain
equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production.
Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $3.6 million. Because of the rapid development of new technology, the equipment falls in the three-year MACRS depreciation class. At the end of four years, the market value of the equipment is expected to be $440,000.
Alternatively, the company can lease the equipment from Hendrix Leasing. The leas-e contract calls for four annual payments of $935,000, due at the beginning of the year. Additionally,
Warf Computers must make a security deposit of $210,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent.
3. In the leasing discussion, James informs Nick that the contract could include a purchase option for the equipment at the end of the lease. Hendrix Leasing offers three purchase options:
- a. An option to purchase the equipment at the fair market value.
- b. An option to purchase the equipment at a fixed price. The price will be negotiated before the lease is signed.
- c. An option to purchase the equipment at a price of $200,000.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
<
When you purchased your car, you took out a 5-year annual-payment loan with an interest rate of 5% per year. The annual payment on the car is $5,200. You have just made a payment and have now decided to
pay off the loan by repaying the outstanding balance. What is the payoff amount for the following scenarios?
a. You have owned the car for 1 year (so there are 4 years left on the loan)?
b. You have owned the car for 4 years (so there is 1 year left on the loan)?
a. You have owned the car for 1 year (so there are 4 years left on the loan)?
The payoff if there are 4 years left on the loan is $
(Round to the nearest cent.)
b. You have owned the car for 4 years (so there is 1 year left on the loan)?
The payoff if there is 1 year left on the loan is $
(Round to the nearest cent.)
Victoria Exports (Canada). A Canadian exporter, Victoria Exports, will be receiving six payments of €13,800, ranging from now to 12 months in the future. Since the company keeps cash balances in both Canadian dollars
and U.S. dollars, it can choose which currency to exchange the euros for at the end of the various periods. Which currency appears to offer the better rates in the forward market? (Click on the icon to import the table into
a spreadsheet.)
Period
Days Forward
spot
1 month
C$/euro
1.3347
1.3370
US$/euro
1.3219
1.3224
m
2 months
3 months
1.3392
30
60
1.3229
90
1.3235
180
1.3438
12 months
360
1.3464
1.3239
1.3269
6 months
1.3416
Calculate the forward premium, the Canadian dollar proceeds, and the difference from the spot rate proceeds in the C$/Euro forward market below: (Round the forward premium to three decimal places and the Canadian
dollar amounts to the nearest cent.)
Days
Forward Premium
C$ Proceeds of
Difference
Period
Forward
C$/euro
on the C$/euro
€13,800
Over Spot…
identify the primary sources of financing, both traditional and alternative, accessible to companies seeking sources of funding. To do so, you should:
Collect and curate data and documentary resources from various sources (magazine articles, newspapers, online content, working papers from various institutions, activity reports, performance reports, legal regulations, speeches, appearances, press conferences, etc.).
Analyze the documentary content you have previously curated and collected. During your analysis, consider the context, location, timing, and target audience of the texts.
Reference Article: One Park Financial. (2022). Best alternative business loans and financing for entrepreneurs. https://www.oneparkfinancial.com/blog/alternative-business-funding
Questions:
Identify and summarize the traditional financial avenues available to businesses.
What are the most innovative financing options they could find?
Open-ended question: if you were in the opposite position, as an…
Chapter 21 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 21 - Leasing vs. Borrowing What are the key differences...Ch. 21 - Leasing and Taxes Taxes are an important...Ch. 21 - Leasing and IRR What arc some of the potential...Ch. 21 - Leasing Comment on the following remarks: a....Ch. 21 - Accounting for Leases Discuss the accounting...Ch. 21 - IRS Criteria Discuss the IRS criteria for...Ch. 21 - Off- Balance Sheet Financing What is meant by the...Ch. 21 - Sale and Leaseback Why might a firm choose to...Ch. 21 - Leasing Cost Explain why the aftertax borrowing...Ch. 21 - Leasing vs. Purchase Why wouldnt Azul Linhas Arcas...
Ch. 21 - Reasons to Lease Why would ILFC be willing to buy...Ch. 21 - Leasing What do you suppose happens to the plane...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Prob. 7QPCh. 21 - Prob. 8QPCh. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Debt Capacity Monster Magnet Manufacturing is...Ch. 21 - Setting the Lease Price An asset costs 720,000 and...Ch. 21 - Lease or Buy Wolfson Corporation has decided to...Ch. 21 - Setting the Lease Price An asset costs 590,000 and...Ch. 21 - Automobile Lease Payments Automobiles arc often...Ch. 21 - Prob. 17QPCh. 21 - Lease or Buy High electricity costs have made...Ch. 21 - THE DECISION TO LEASE OR BUY AT WARF COMPUTERS...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- XYZ stock price and dividend history are as follows: Beginning-of- $ 130 Dividend Paid at Year Year Price Year-End 2021 $ 2 2022 2023 153 2 2024 128 133 2 2 An investor buys five shares of XYZ at the beginning of 2021, buys another two shares at the beginning of 2022, sells one share at the beginning of 2023, and sells all six remaining shares at the beginning of 2024. Required: a. What are the arithmetic and geometric average time-weighted rates of return for the investor? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Arithmetic time-weighted average returns Geometric time-weighted average returns % % b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2021, to January 1, 2024. Note: Negative amounts should be indicated by a minus sign. Date 01/01/2021 01/01/2022 Cash Flow 01/01/2023 01/01/2024 b-2. What is the dollar-weighted rate of return? (Hint. If your calculator cannot calculate…arrow_forwardConsider the following two banks: Bank 1 has assets composed solely of a 10-year, 11.50 percent coupon, $1.5 million loan with a 11.50 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $1.5 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 11.50 percent, zero-coupon bond with a current value of $1,108,283.85 and a maturity value of $2,374,515.87. It is financed with a 10-year, 5.75 percent coupon, $1,500,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and liabilities of each bank? Note: Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, not millions of dollars. Round your answers to 2 decimal places. (e.g., 32.16) Before Interest Asset Value After Interest…arrow_forwardTIME TO REACH A FINANCIAL GOAL You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal? Round UP to the nearest year. (Example 5.01 years = 6 years) Your answer should include numerical value only.arrow_forward
- You plan to retire in 30 years. • In 50 years, you want to give your daughter a $500,000 gift. • You will receive an inheritance of $200,000 in 25 years. • You think you will want $50,000 per year when you retire for 30 years (the first withdrawal will come one year after retirement). • You will begin saving an amount to meet your retirement goals one year from today. Required: • If you think you can make 9% on your investments, how much will you need to save each year for the next 30 years to meet your retirement goals?arrow_forwardAn initial $3300 investment was worth $3820 after two years and six months. What quarterly compounded nominal rate of return did the investment earn? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Nominal rate of return % compounded quarterly.arrow_forwardSuppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.arrow_forward
- Please don't use Ai solutionarrow_forwardng Equipment is worth $998,454. It is expected to produce regular cash flows of $78,377 per year for 20 years and a special cash flow of $34,800 in 20 years. The cost of capital is X percent per year and the first regular cash flow will be produced in 1 year. What is X? Input instructions: Input your answer as the number that appears before the percentage sign. For example, enter 9.86 for 9.86% (do not enter .0986 or 9.86%). Round your answer to at least 2 decimal places. percentarrow_forward3 years ago, you invested $6,700. In 5 years, you expect to have $12,201. If you expect to earn the same annual return after 5 years from today as the annual return implied from the past and expected values given in the problem, then in how many years from today do you expect to have $25,254?arrow_forward
- 4 years ago, you invested $3,600. In 2 years, you expect to have $7,201. If you expect to earn the same annual return after 2 years from today as the annual return implied from the past and expected values given in the problem, then in how many years from today do you expect to have $10,022? Input instructions: Round your answer to at least 2 decimal places. yearsarrow_forwardSince ROE can sometimes be boosted artificially through financial leverage, do you think it would be more beneficial for investors to rely on a combination of ROE and other financial health indicators, such as the debt-to-equity ratio or interest coverage ratio, when assessing a stock's long-term potential?arrow_forwardGiven that Merck and Pfizer both face revenue risks from patent expirations, how do you think financial managers at these companies should adjust their capital structure to maintain stability and investor confidence?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Fixed Asset Replacement Decision 1235; Author: Accounting Instruction, Help, & How To;https://www.youtube.com/watch?v=LJRzn9K8Nwk;License: Standard Youtube License