The key terms of each of these financing alternatives

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Unformatted text preview: borrow the full $3 million from First Shreveport Bank. The bank will charge 12% annual interest and require annual end-of-year payments of $1,249,050 over the next 3 years. The disposal system will be depreciated under MACRS using a 3-year recovery period. (See Table 3.2 on page 100 for the applicable depreciation percentages.) The firm will pay $45,000 at the end of each year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. Debt with Warrants The firm can borrow the full $3 million from Southern National Bank. The bank will charge 10% annual interest and will, in addition, require a grant of 50,000 warrants, each allowing the purchase of two shares of the firm’s stock for $30 per share at any time during the next 10 years. The stock is currently selling for $28 per share, and the warrants are estimated to have a market value of $1 each. The price (market value) of the debt with the warrants attached is estimated...
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