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Fin540 Chapter 19 Essay

872 words - 4 pages

FIN 540 – Homework Chapter 18
Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points for this homework assignment. 1. Which of the following statements is most CORRECT? a. Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements. b. Capitalizing a lease means that the firm issues equity capital in proportion to its current ...view middle of the document...

b. c. d. is financed with short-term debt. is financed with long-term debt. is financed with debt whose maturity matches the term of the lease. is financed with a mix of debt and equity based on the firm’s target capital structure, i.e., at the WACC. e. is financed with retained earnings. 4. Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be

©2011 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. FIN 540 Homework Chapter 18 Page 1 of 2

FIN 540 – Homework Chapter 18
borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?...

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