ch20 - CHAPTER20 HybridFinancing...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
    20-1 CHAPTER 20 Hybrid Financing:   Preferred Stock, Leasing, Warrants, and  Convertibles Preferred stock Leasing Warrants Convertibles
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
    20-2 Leasing Often referred to as “off balance sheet”  financing if a lease is not “capitalized.” Leasing is a substitute for debt financing and,  thus, uses up a firm’s debt capacity. Capital leases are different from operating  leases: Capital leases do not provide for maintenance  service. Capital leases are not cancelable. Capital leases are fully amortized.
Image of page 2
    20-3 Analysis: Lease vs. Borrow- and-buy Data: New computer costs $1,200,000. 3-year MACRS class life; 4-year economic life. Tax rate = 40%. k d  = 10%. Maintenance of $25,000/year, payable at  beginning of each year. Residual value in Year 4 of $125,000. 4-year lease includes maintenance. Lease payment is $340,000/year, payable at  beginning of each year.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
    20-4 Depreciation schedule Depreciable basis = $1,200,000 MACRS  Depreciation End-of-Year Year   Rate     Expense Book Value    1   0.33  $   396,000   $804,000    2   0.45         540,000       264,000    3   0.15         180,000                 84,000    4   0.07          84,000                           0      1.00    $1,200,000
Image of page 4
    20-5 In a lease analysis, at what discount  rate should cash flows be discounted? Since cash flows in a lease analysis are  evaluated on an after-tax basis, we should  use the after-tax cost of borrowing.   Previously, we were told the cost of debt, k d was 10%.  Therefore, we should discount  cash flows at 6%. A-T kd = 10%(1 – T) = 10%(1 – 0.4) =  6% .
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
    20-6 0 1 2 3 4 Cost of Owning Analysis Cost of asset (1,200.0) Dep. tax savings 1 158.4 216.0 72.0 33.6 Maint. (AT) 2 (15.0) (15.0) (15.0) (15.0) Res. value (AT) 3 ______ _____ _____ _____ 75.0 Net cash flow (1,215.0) 143.4 201.0 57.0 108.6 PV cost of owning (@ 6%) = -$766.948. Analysis in thousands:
Image of page 6
    20-7 Notes on Cost of Owning  Analysis 1. Depreciation is a tax deductible  expense, so it produces a tax savings of  T(Depreciation).  Year 1 = 0.4($396) =  $158.4. 2. Each maintenance payment of $25 is  deductible so the after-tax cost of the  lease is (1 – T)($25) = $15. 3. The ending book value is $0 so the full  $125 salvage (residual) value is taxed,  (1 - T)($125) = $75.0.
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
    20-8 Cost of Leasing Analysis Each lease payment of $340 is deductible,  so the after-tax cost of the lease is  (1-T)($340) = -$204. PV cost of leasing (@6%) = -$749.294. 0 1 2 3 4 A-T Lease pmt -204 -204 -204 -204 Analysis in thousands:
Image of page 8
    20-9 Net advantage of leasing NAL = PV cost of owning – PV cost of leasing NAL = $766.948 - $749.294 = $17.654   Since the cost of owning outweighs the cost  of leasing, the firm should lease.
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern