CHAPTER_25 - CHAPTER 25 Leasing Answers to Problem Sets 1....

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1 CHAPTER 25 Leasing Answers to Problem Sets 1. A, c; B, d or i; C, b or e; D, f; E, a; F, h; G, g. 2. a, b, d, f, and h (though there may be other ways to reduce AMT). 6. A leveraged lease is a three-way transaction among the lessor, the lessee, and lenders. The lenders put up about 80% of the cost of the leased asset in return for nonrecourse debt. The lenders have first claim on the lease payments and the leased asset. The lessor gets interest and depreciation tax shields. The lessor gets the asset at the end of the lease unless the lessee exercises an option to buy the asset. 7. Lenders have no claim on the lessor if the lessee defaults. The lessor avoids liability in this case. But lenders will demand better terms, for example, a higher interest rate, as compensation for lack of recourse. 8. The present value of the costs and the present value of the lease payments are shown in the following table: t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 Initial Cost -3000.00 Depreciation 600.00 960.00 576.00 345.60 345.60 172.80 Depreciation tax shield 210.00 336.00 201.60 120.96 120.96 60.48 After-tax admin. costs -260.00 -260.00 -260.00 -260.00 -260.00 -260.00 Total -3260.00 -50.00 76.00 -58.40 -139.04 -139.04 60.48 PV(at 9%) = -$3,439.80 Break-even rent 1082.29 1082.29 1082.29 1082.29 1082.29 1082.29 Tax -378.80 -378.80 -378.80 -378.80 -378.80 -378.80 Break-even rent after tax 703.49 703.49 703.49 703.49 703.49 703.49 PV(at 9%) = -$3,439.80 Cash Flow -2556.51 653.49 779.49 645.09 564.45 564.45 60.48 The break-even lease rate (after tax) is the payment for a six-year annuity
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CHAPTER_25 - CHAPTER 25 Leasing Answers to Problem Sets 1....

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