Reference no: EM13940747
LEVERAGED LEASE
Please read the case study carefully and answer the questions below
ABC Company of Kuwait is the largest independent owner-operator of large-scale automated self-storage complexes in Kuwait City area. The first self-storage complex was opened in Kuwait in 1997 and now has facilities throughout downtown Kuwait City and nearby residential areas. The business is based on a franchise management company located in Michigan state (USA).
Mr. Sarfaz, CEO of ABC, was considering options for financing $1,000,000 of new forklifts needed for the commercial storage facilities. In Kuwait there was no corporate tax, therefore ABC could not take advantage of the equipment's depreciation tax shield. Mr. Sarfaz was considering a fifteen years lease of the equipment.
The Canadian lessor, DEF Leasing Co., had offered to structure a capital lease for ABC Company, as long as DEF could arrange non-recourse financing for the equipment. DEF wanted to purchase the forklifts with $200,000 of its own cash and $800,000 borrowed from a bank in Dubai at 7.5%. The leasing company's effective tax rate was 30%, and Canadian tax laws permit use of the double-declining balance method for leasing companies. The forklifts had a tax life of seven years.
DEF Leasing Co. estimated that it could sell the equipment for $200,000 (the residual value after fifteen years). ABC, the lessee, had requested an early buyout option (EBO) after ten years. Immediately upon purchase, the lessor would lease the equipment to the lessee for fifteen years. Rents would be paid monthly, on the same day the debt services were due, and the rents always would be sufficient to pay debt service.
When Mr. Sarfaz received a fax summarizing the terms of the lease, he could hardly believe his eyes. The lessor offered ABC a 15-year lease with 180 equal monthly payments of $8,052. This included an effective interest rate of only 6.5% per annum. Not only was the rate very attractive, but ABC Company would also receive 100% financing with no downpayment. He decided to try for the early buyout option and scribbled "Accepted, as long as we get the EBO!" on the term sheet, signed it, and faxed it back to Toronto.
QUESTIONS:
1. Show, with a diagram, the cash flows in this deal, assuming no Early Buyout Option.
2. Would the deal make sense for DEF Leasing, assuming that its shareholders insist on a required return on equity of 15% p.a.?
|
What are your reservations about staff reduction efforts
: What are your reservations about staff reduction efforts? What can a manager, do to become more confident in facing reduction in workforce issues?
|
|
Write a java program that can serve as a simple calculator.
: Write a Java program that can serve as a simple calculator. This calculator keeps track of a single number (of type double) that is called result and that starts out as 0.0.
|
|
Explain specifics about penalties that led to your opinion
: Explain the specifics about the penalties that led to your opinion. In addition, explain whether you think most policies in the system have the goal of:- Using punishment or threat of punishment to deter people from committing crime.
|
|
Break-even chart to illustrate this solution
: Each additional unit a company produces costs £45 to manufacture and it can sell each unit it produces for a fixed price of £72. The firm also has fixed costs of £8,100.
|
|
Show with a diagram the cash flows in this given deal
: Show, with a diagram, the cash flows in this deal, assuming no Early Buyout Option. Would the deal make sense for DEF Leasing, assuming that its shareholders insist on a required return on equity of 15% p.a.
|
|
Steps in market research process
: List the four steps in market research process? Describe in some detail the three types of research that are typically used in a business environment and any specify areas of research interest to business?
|
|
Determine for a rotational speed of 1000 rpm
: Determine for a rotational speed of 1000 rpm (a) the radial force which each shoe exerts on the drum, (b) the torque transmitted, (c) the power transmitted
|
|
Write a program that asks for the speed of a vehicle
: Write a program that asks for the speed of a vehicle (in miles-per-hour) and the number of hours it has traveled.
|
|
Rate of interest a credit card company charges
: Which of the projects A and B below would be best according to (a) the NPV criterion, (b) the IRR criterion, if the market rate of interest is 6% per annum?
|