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Edith Aviation is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Year 1 Lease = -64,329 Purchase= -68,454 Year 2 Lease= -64,329 Purchase= -59,110 Year 3 Lease= -64,329 Purchase= -63,596 Year 4 Lease= -64,329 Purchase= 66,633 Year 5 Lease= 64,329 Purchase= 30,056 (a) Given the above cash outflows for each alternative, calculate the present value of the after-tax cash flows using the after-tax cost of debt for each alternative. (b) Which alternative do you recommend? Why?
Company JUK has a ROE of 25% and the company will not pay any dividend for the next 3 years. It is estimated that the company will pay $2 dividend per share after three years and then to level off to 5% per year forever. What is your estimate of the ..
You bought a house five years ago for $400,000. At that time you borrowed 80% of its value at a fixed rate 15-year loan at an annual stated rate of 8%, with monthly payments. Should you refinance the remaining balance of your loan with the new bank? ..
Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity. If interest rates suddenly rise by 2 percent, what is the perce..
Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:
Determine the key factors that will drive the financial planning process for most organizations in the post-merger phase, and examine the related impact to the organization process. Provide support for your rationale.
David has a Homeowners 3 policy that provides $360,000 of insurance on his dwelling, which has a current replacement value of $400,000. Ignoring any deductible, how much will David collect if a kitchen with a replacement value of $24,000 but an actua..
An incentive program that encourages new ideas, whether for new products or better processes, is a good way to generate capital investment proposals. Capital expenditures are long term & expensive. A post audit is an important step in the capital bud..
A company has a before tax cost of common equity of 14%, a pretax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million deb..
A home identical to yours in your neighborhood, sold last week for $150,000. Your home has a $120,000 assumable, 8% mortgage (compounded annually) with 30 years remaining. An assumable mortgage is one that the new buyer can assume at the old terms, c..
Suppose you are committed to owning a $197,000 Ferrari. If you believe your mutual fund can achieve a 11 percent annual rate of return and you want to buy the car in 8 years on the day you turn 30, how much must you invest today?
Shadow Corp. has no debt but can borrow at 8.0 percent. The firm’s WACC is currently 9.8 percent, and the tax rate is 35 percent. What is Shadow’s cost of equity? If the firm converts to 15 percent debt, what will the company's WACC be? If the firm c..
What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why the CCC is important to business.
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