99271fromtable5inappendixa 11978130 date 1111 123111

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Unformatted text preview: 73 Therefore, cash outflows exceed cash inflows by $36,927. c. Cash outflows Post­tax interest payments = [$3,000 (1 – tax rate)] 8 payments = [$3,000 (1 – 34%)] 8 payments = $15,840 Total principal payment = $100,000 on maturity of the bonds Total cash outflow = $15,840 + $100,000 = $115,840 Cash inflows Cash inflows = Proceeds received upon issuing the bonds = $87,073 Therefore, cash outflows exceed cash inflows by $28,767. d. Cash outflows Individual post­tax interest payments = $3,000 (1 – tax rate) = $1,980 Present value of post­tax payments = $1,980 Present value of an ordinary annuity for i = 5% and n = 8) = $1,980 6.4632 from Table 5 in Appendix A = $12,797 Total principal payment = $100,000 on maturity of the bonds Present value of principal payment = $67,684 [from part (a)] Total cash outflow = $12,797 + $67,684 = $80,481 Cash inflows Cash inflows = Proceeds received upon issuing the bonds = $87,073 Therefore, cash inflows exceed cash outflows by $6,592. P11–13 a. On the financial statements a capital lease is treated like the company had purchased the fixed assets. The asset and the related liability are recorded on the balance sheet and interest and depreciation are recorded on the income statement. An operating lease is treated like a recurring expense each month but nothing is recorded on the balance sheet. The amount of the lease payment is shown as an expense each month. b. A company may want to treat leases as operating leases because there is no debt that is recorded on the balance sheet. This treatment impacts a number of financial ratios (debt­to­equity, for example) and so may be to the company’s advantage to treat it like an operating lease. c. total liability ÷ total asset ratio if Wal­Mart treats these leases as: currently recorded: $98 ÷ $163 = 60.1% if all leases are capital leases: $106.1 (98 + 8.1) ÷ $171.1 (163 + 8.1) = 62.0% $3.5 ÷ $5.5 = 63.6%, 63.6% of $12.8 billion = $8.1 billion d. An analyst needs to be able to compare companies that use di...
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