Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

# They currently are not at least not in a systematic

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Unformatted text preview: ,421,250 – \$1,421,250 –\$446,250 – –\$1,500,000 \$1,500,000 525,000 525,000 –446,250 –446,250 – \$1,500,000 525,000 –446,250 Year 1 Year 2 Year 3 Year 4 –446,250 b. The company is indifferent at the lease payment which makes the NAL of the lease equal to zero. The NAL equation of the lease is: 0 = \$4,125,000 – PMT(1 – .35) – PMT(1 – .35)(PVIFA5.85%,3) – \$446,250 / 1.05854 PMT = \$1,483,252.12 15. a. The different borrowing rates are irrelevant. A basic tenant of capital budgeting is that the return of a project depends on the risk of the project. Since the lease payments are affected by the riskiness of the lessee, the lessee’s cost of debt is the appropriate interest rate for the analysis by both companies. Since the both companies have the same tax rate, there is only one lease payment that will result in a zero NAL for each company. We will calculate cash flows from the depreciation tax shield first. The depreciation tax shield is: Depreciation tax shield = (\$330,000/3)(.34) = \$37,400 The aftertax cost of debt is the lessee’s cost of debt, which is: Aftertax debt cost = .09(1 – .34) = .0594 Using all of this information, we can calculate the lease payment as: b. 430 NAL = 0 = \$330,000 – PMT(1 – .34)(PVIFA5.94%,3) + \$37,400(PVIFA5.94%,3) PMT = \$130,180.63 431 c. Since the lessor’s tax bracket is unchanged, the zero NAL lease payment is the same as we found in part b. The lessee will not realize the depreciation tax shield, and the aftertax cost of debt will be the same as the pretax cost of debt. So, the lessee’s maximum lease payment will be: NAL = 0 = –\$330,000 + PMT(PVIFA9%,3) PMT = \$130,368.07 Both parties have positive NAL for lease payments between \$130,180.63 and \$130,368.07. 16. The APR of the loan is the lease factor times 2,400, so: APR = 0.00342(2,400) = 8.21% To calculate the lease payment we first need the net capitalization cost, which is the base capitalized cost plus any other costs, minus any down payment or rebates. So, the net capitalized cost is: Net capitalized cost = \$28,000 + 450 – 2,000 Net capitalized cost = \$26,450 The depreciation charge is the net capitalized cost minus the residual value, divided by the term of the lease, which is: Depreciation charge = (\$26,450 – 16,500) / 36 Depreciation charge = \$276.39 Next, we can calculate the finance charge, which is the net capitalized cost plus the residual value, times the lease factor, or: Finance charge = (\$26,450 + 16,500)(0.00342) Finance charge = \$146.89 And the taxes on each monthly payment will be: Taxes = (\$276.39 + 146.89)(0.07) Taxes = \$29.63 The monthly lease payment is the sum of the depreciation charge, the finance charge, and taxes, which will be: Lease payment = \$276.39 + 146.89 + 29.63 Lease payment = \$452.91 432 Challenge 17. With a four-year loan, the annual loan payment will be \$4,500,000 = PMT(PVIFA8%,4) PMT = \$1,358,643.62 The aftertax loan payment is found by: Aftertax payment = Pretax payment – Interest tax shield So, we need to find the interest tax shield. To find this, we need a loan amortization table since the interest payment each year is the beginning balance times the loan interest rate of 8 percent. The interest tax shield is the interest payment times the tax rate. The amortization table for this loan is: Year 1 2 3 4 Beginning balance \$4,500,000.0 0 3,501,356.38 2,422,821.27 1,258,003.35 Total payment \$1,358,643.6 2 1,358,643.62 1,358,643.62 1,358,643.62 Interest payment \$360,000.00 280,108.51 193,825.70 100,640.27 Principal payment \$998,643.62 1,078,535.1 1 1,164,817.9 2 1,258,003.3 5 Ending balance \$3,501,356.3 8 2,422,821.27 1,258,003.35 0.00 So, the total cash flows each year are: Aftertax loan payment cash flow Year 1: \$1,358,643 – (\$360,000)(.35) = \$1,232,643.62 – Year 2: \$1,358,643 – (\$280,108.51)(.35) = \$1,260,605.64 – Year 3: \$1,358,643 – (\$193,825.70)(.35) = \$1,290,804.62 – Year 4: \$1,358,643 – (\$100,640.27)(.35) = \$1,323,419.53 – So, the NAL with the loan payments is: NAL = 0 – \$38,606.38/1.052 – \$10,644.36/1.0522 + \$19,554.62/1.0523 + \$52,169.53/1.0524 NAL = \$13,074.25 The NAL is the same because the present value of the aftertax loan payments, discounted at the aftertax cost of capital (which is the aftertax cost of debt) equals \$4,500,000. 18. a. The decision to buy or lease is made by looking at the incremental cash flows, so we need to find the cash flows for each alternative. The cash flows if the company leases are: Cash flows from leasing: Aftertax cost savings = \$12,000(1 – .34) Aftertax cost savings = \$7,920 OCF 1,271,250 1,271,250 1,271,250 1,271,250 = = = = Total –\$38,606.38 –10,644.36 19,554.62 52,169.53 433 The tax benefit of the lease is the lease payment times the tax rate, so the tax benefit of the lease is: Lease tax benefit = \$27,000(.34) 434 Lease tax benefit = \$9,180 We need to remember the lease payments are due at the beginning of the year. So, if the company leases, the cash flows each year will be: Year 0 A...
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## This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of Texas-Tyler.

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