LT Cap mgmt HW for final.pdf - BUAD 296 Quiz 5 Problem(11...

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BUAD 296 Quiz 5 Problem - (11 marks) Giant Global Construction Company is considering whether to refund a $20,000,000 20-year 7% (paid semi-annually) coupon bond that was issued five years ago. The issue costs at that time were $600,000. The call price is 104. The replacement would be a $20,000,000 15-year 5% (paid semi-annually) coupon bond issue, with underwriting (flotation) costs of $475,000. There would be a one-month overlap, with surplus funds earning 2% for that one month. The tax rate is 40%. Required: Use NPV analysis to determine whether the company should refund the bond issue. Item Calculation NPV Other calculations:
BUAD 296 Quiz 5 Problem - (12 marks) Rocky’s Road Construction needs to buy a new excavator for its road building work. A large Cat excavator can be obtained on a 6-year operating lease for $150,000 per year due at the beginning of each year. The lease payment would include maintenance costs of $10,000 per year which would have to be paid separately if the machine is purchased. Alternatively, the excavator could be purchased for $750,000. The excavator would be subject to a 20% Capital Cost Allowance rate. The excavator would have an expected trade in (salvage) value at the end of 6 years of $50,000. (The trade in value is quite uncertain so the WACC would be the most appropriate discount rate for this part of your calculation.) The company can borrow to finance the purchase at 12%. The company’s WACC is 15% and its corporate tax rate is 40%. Required: Use NPV analysis to determine whether the company should lease the machine or purchase it. Purchase: Item Calculation NPV Lease: Item Calculation NPV Decision: Lease or Buy? _______________________ Calculations:
BUAD 296 Quiz 6

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