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The Jacob Company needs to acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by the bank at an interest rate of 12%. The loan must be repaid in four equal installments, payable at the end of each year. Under this borrow-to-purchase arrangement, Jacob would have to maintain the truck at a cost of $1200 payable at year-end. Alternatively, Jacob could lease the truck on a 4-year contract for a lease payment of $11,000 per year. Each annual lease payment must be made at the beginning of each year. The truck would be maintained by the lessor. The truck is a class 10 asset with a CCA rate of 30%; its expected market value after 4 years is $10,000. At that time Jacob plans to replace the truck irrespective of whether it leases or buys. Jacob has a marginal tax rate of 40% and a MARR of 15%.
(a) What is Jacob’s present equivalent cost of leasing?
(b) What is Jacob’s present equivalent cost of owning?
(c) Should the truck be leased or purchased?
Assume the standard deviation of security A is 0.3 and the standard deviation of security B is 0.33. The correlation coefficient between A and B is 0.4. What is the standard deviation of a portfolio composed of 55% security and 45% security B?
A 20-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $950. If the yield to maturity remains at its current rate, what will the price be 10 years from now? $950.00 $946.22 $964.80 $863.84 $1,000
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Among the assets in a decedent’s gross estate is stock in a closely held corporation that was left to a nephew. The interest passing to the nephew is required to bear the burden of all estate taxes and expenses. What amount of closely held corporate ..
The writer of a call option has
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Grandview Clinic has fixed costs of $2.04 million and an average variable cost rate of $15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of $131 for each of its 20402 members. Past experience indicates the population se..
A share of stock with a beta of .74 now sells for $50. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 5%, and the market risk premium is 8%. The stock is a good/bad buy and the investors will/will not invest?. At what..
Texas Transport has five possible investment projects for the coming year. Each project is indivisible. The firm's weighted marginal cost of capital schedule is 12 percent for up to $6 million of investment; 16 percent for between $6 million and $18 ..
Suppose you create a portfolio by holding 100 shares of McDonald’s stock, writing a call option on the stock with an exercise price of $55 and one year to expiration, and writing a put option on the same stock with an exercise price of $25 and one ye..
Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached her about a mortgage for a house he is building. ..
Which of the following statements about the net present value method of selecting projects is true?
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