Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 25, Problem 8PS
Operating leases Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,000 desk. Desks last for six years and can be
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Acme has branched out to rentals of office furniture to start-up companies. Consider a $4,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $360 per desk at the beginning of each year. The cost of capital is 9% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $4,600 desk. The company has just issued five-year notes at an interest rate of 6% per year.
What is the break-even rate in this case?
The Cupcake World Factory plans to open a new retail store in St. Louis, Missouri. The store will sell specialty cupcakes for $6 per cupcake (each cupcake has a variable cost of $3.) The company is negotiating its lease for the
new store. The landlord has offered two leasing options: 1) a lease of $2,000 per month; or 2) a monthly lease cost of $800 plus 5% of the company's monthly sales revenue.
Requirements
If the Cupcake World Factory plans to sell 3,000 cupcakes a month, which lease option would cost less each month? Why?
If the company plans to sell 5,500 cupcakes a month, which lease option would be more attractive? Why?
1.
2.
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Requirement 1. If the Cupcake World Factory plans to sell 3,000 cupcakes a month, which lease option would cost less each month? Why?
Begin by calculating the indifference point. Select the equation to determine the indifference point. (Abbreviations used: FC = Fixed costs, VCU = Variable costs per unit)
(VCU (option 1) × Units) + FC (option 1) = (VCU…
Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost them $600,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?
a. $64,070.
b. $70,476.
c. $10,476.
d. $30,314.
Chapter 25 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Operating leases Acme has branched out to rentals...Ch. 25 - Prob. 9PSCh. 25 - Prob. 10PSCh. 25 - Technological change and operating leases Look at...
Ch. 25 - Prob. 12PSCh. 25 - Taxes and leasing Look again at the bus lease...Ch. 25 - Taxes and leasing In Section 25-4 we showed that...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Prob. 18PSCh. 25 - Valuing leases The Safety Razor Company has a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 22PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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