DUMMYQuestion 1) What is the minimum lease payment that would make purchasing a computer system and...

Question

DUMMYQuestion 1)  What is the minimum lease payment that would make purchasing a computer system and writing a 6-year lease contract on it? The price of the computer system is $175,000, it is a five-year asset for depreciation purposes, it has a residual value of $3,000, it requires $500 maintenance per year, the cost of capital is 9%, and the corporate tax rate is 40%. (Note: MACRS rates for Years 1 to 6 are 0.20, 0.32, 0.19, 0.12, 0.11 and 0.06.)  Question 2)  Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)  Question 3) What is IPO underpricing?  Use the following information for questions 4 and 5 A company is planning to go public. Currently, the pre-IPO value of the firm’s equity is $95 million, the number of outstanding shares is 3.5 million, the company need to raise $17 million, and the floatation cost of new equity is 12%.  Question 4)  Calculate the gross proceeds needed from an IPO given the above information.   Question 5)  Part a What is the post-IPO equity value?  Part b What is the offer price?

Shanu · Accepted Answer

Answer 1
In this question, we have to calculate the minimum lease payment of the computer system for 6 year. 
We have given the value of computer which is $175,000 and we have also given the MACRS to calculate the depreciation on the computer system. 
Depreciation charge on the computer system will result in the tax saving which in turn means cash inflow for us. 
Let’s first calculate the savings on the computer system if we buy the system
	Year
	Depreciation
	Calculation using MACRS
	MACRS
	Maintaince Cost
	Residual Value
	Total Cost
	Tax Rate 
	Tax Saving on cost
	1
	35,000
	           35,000 
	20%
	500
	                   -   
	35,500
	40%
	       14,200 
	2
	56,000
	           56,000 
	32%
	500
	                   -   
	56,500
	40%
	       22,600 
	3
	33,250
	           33,250 
	19%
	500
	                   -   
	33,750
	40%
	       13,500 
	4
	21,000
	           21,000 
	12%
	500
	                   -   
	21,500
	40%
	          8,600 
	5
	19,250
	           19,250 
	11%
	500
	       3,000.00 
	16,750
	40%
	          6,700 
	6
	10,500
	           10,500 
	6%
	500
	                   -   
	11,000
	40%
	          4,400 
Now we will calculate the net present value of all the future cash flows. We have $175,000 cash outflow and tax saving as inflow (calculated above) in the coming 6 years.
Net present value = Present value of cash inflows – Present value of cash outflows.

Question 1) What is the minimum lease payment that would make purchasing a computer system and writing a 6-year lease contract on it? The price of the computer system is $175,000, it is a five-year...

Answer To: Question 1) What is the minimum lease payment that would make purchasing a computer system and...

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment