What is the expected compound rate of return

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Question: Hemp Airlines (HA, "we fly high") is about to buy 5 CFA3000 commuter jets. Each airplane costs $50 million. A friendly bank has put together a consortium to finance the deal. The consortium includes a 20% equity investment and an 80% debt component. The debt has an interest rate of 8% annually, and is a term loan over 10 years.

At the end of each of the next 10 years, HA will pay a lease payment of $35 million. At the end of the 10-year lease term, Hemp has the option to buy the aircraft for $10 million each; it is anticipated that it will exercise this option in which the planes are priced at their anticipated fair market value. The airplanes will be depreciated on a straight-line basis over 5 years to zero salvage value. If the equity partner in the lease has a tax rate of 35%, what is its expected compound rate of return?

Reference no: EM131453658

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