Reference no: EM133122640

Case A.  Assume Venture Healthcare issued $80 million worth of $1000 par value bonds. The company's bonds have a 12% coupon rate with annual payments, and a 10-year maturity.  

a. What would be the dollar amount of annual interest each year?

b. Calculate the debt service requirements per year until maturity.

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Case B: Walton Nursing Home (WHN) is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8% rate on a four-year loan if WHN decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of year 4. If WHN buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WHN's tax rate is 40%.

Modified Accelerated Cost Recovery System (MARCS) for year 1 = 33%; Year 2 = 45%; Year 3 = 15%; Year = 7%

a. Calculate the after-tax cost of debt.

b. Calculate the net cash flows associated with owning the laundry equipment for year 0; year 1.

c. Calculate the net cash flows associated with leasing the laundry equipment for year 0; year 1.

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