EFN412_Topic_04_Reading_and_Tutorial_Guide

EFN412_Topic_04_Read - Queensland University of Technology School of Economics and Finance EFN412 Advanced Managerial Finance Topic Four Debt

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Queensland University of Technology School of Economics and Finance EFN412 Advanced Managerial Finance Topic Four Debt Finance 2 – Leasing Tutorial and Reading Guide: Reading: PBEHP textbook, 10 th edition, Ch.15 or 9 th edition Ch 16 titled “Leasing and Other Equipment Finance”. Learning Objectives: What to Look for This Week Definitions Nature of Leases (another form of debt) Types of leases Accounting and Tax Treatment of Leases Setting Lease Premiums Evaluation of Lease v Borrow to Buy (Economic Treatment) APV (adjusted present value) Commercial Hire Purchase Alleged Advantages and Disadvantages of Leasing Self-Study Questions Question 1 In each of the following cases, determine what the appropriate lease premium will be: Case Value of Asset Term Payments (Annual) Residual Leasing Rate A $10,000 5 years in arrears $1,000 10% B $300,000 10 years in arrears $15,000 12% C $35,000 3 years in advance $5,000 15% D $100,000 4 years in advance Nil 10% 1
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In each of the following cases, derive the interest rate the lessor is implicitly charging in the lease premiums: Case Value of Asset Term Payments Residual Lease Premiums A $25,000 5 years in arrears $3,000 $5,576 B $100,000 10 years in advance $8,000 $15,346 Question 3 A company is considering whether it should lease or borrow to purchase a piece of equipment worth $20,000. The lease involves 4 payments in arrears of $7,260, as well as a residual payment of $2,500. Lease and taxation payments will be made at the end of each financial year . The taxation rate is 50% and the firm has a 12% opportunity borrowing rate. Such equipment qualifies for 30% reducing balance depreciation if owned, and the equipment is expected to have a salvage value of $4,000 at the end of year 4. If the company borrows money to buy the equipment, what will the tax shield from borrowing be? Calculate the NPV of leasing and advise the company how they should finance the asset. Question 4 The opportunity cost of borrowing for an asset which has a purchase price of $40,000 is 15%. This asset can be depreciated at 20% reducing balance, and has an expected salvage value of $10,000 at the end of its 4 year life. The tax rate is 40%. As an alternative to borrowing to purchase, a finance company has offered a four year lease with payments at the end of each year of $14,706, with a residual payment of $4,000. Your boss has refused this offer , but wishes to persue a lease agreement with 4 payments in advance , along with a residual payment of $8,000. (a) What lease premium will the finance company set for payments in advance . Hint: you need to derive i L from the information given. (b) Your boss wants to know whether he should go ahead with the lease (instead of the purchase) based on the new lease premiums calculated in advance. Provide the calculations to make this decision. 2
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This note was uploaded on 09/15/2010 for the course BUSINESS 412 taught by Professor John during the Three '10 term at Queensland Tech.

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EFN412_Topic_04_Read - Queensland University of Technology School of Economics and Finance EFN412 Advanced Managerial Finance Topic Four Debt

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