Reference no: EM1313775

Objective type questions on selecting lease option

1. Deep River Power Corporation recently sold an issue of preferred stock that had an after-tax yield of 9.6 percent. The company's new bonds recently sold at par with an after-tax yield of 8.1 percent. Both issues were placed primarily with corporate investors in the 40 percent tax bracket. Given that the preferred stock enjoys a 70 percent dividend tax exclusion for corporate investors, what was the percentage point difference in the before-tax yields between the two issues?

a. 1.50%

b. 1.20%

c. 2.59%

d. 2.81%

e. 0.21%

2. Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm's production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end-of-year lease payments of $2,100,000. The firm's tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000. What is the net advantage to leasing (NAL)?

a. $0

b. $106,200

c. $362,800

d. $433,100

e. $647,900