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# Purchase of New Car Options: Debt vs. Equity

You are considering the purchase of new car. You have negotiated with the salesperson at the dealership and you can purchase the vehicle for \$30,000. You have \$8,000 that you can use as a down payment.

Prior to going into the dealership, you have set an absolute limit of \$375 for the amount of monthly payments that you can make on the car. You are willing to finance over five years but you cannot exceed the payment of \$375 per month. The dealer is willing to offer you financing at an annual rate of 6.5% for a 5-year loan. The dealer is willing to offer 5.5% financing on a 4-year loan.

CalculatorWeb's loan calculator lets you specify any single item to calculate if the other four variables are specified. The value should be entered as whole numbers without commas.

1. Can you meet your payment restriction and finance the amount required for the car?

2. What is the maximum amount that you can borrow to meet your payment restriction if the loan is to be paid off in 5 years?

3. Suppose that you are limited to paying \$375 per month but you want to pay the loan off in 4 years and not 5 years. What is the maximum amount that you can borrow?
What are the disadvantages of debt compared to equity?
What are the advantages of debt compared to equity?
A business invests in new plant and equipment to generate additional revenues and income the basis for its growth. How would a company pay for this investment?
Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires companies to classify equity and debt securities Into three categories. Please explain.

#### Solution Preview

You are considering the purchase of new car. You have negotiated with the salesperson at the dealership and you can purchase the vehicle for \$30,000. You have \$8,000 that you can use as a down payment.

Prior to going into the dealership, you have set an absolute limit of \$375 for the amount of monthly payments that you can make on the car. You are willing to finance over five years but you cannot exceed the payment of \$375 per month. The dealer is willing to offer you financing at an annual rate of 6.5% for a 5-year loan. The dealer is willing to offer 5.5% financing on a 4-year loan.

CalculatorWeb's loan calculator lets you specify any single item to calculate if the other four variables are specified. The value should be entered as whole numbers without commas.

1. Can you meet your payment restriction and finance the amount required for the car?
no
2. What is the maximum amount that you can borrow to meet your payment restriction if the loan is to be paid off in 5 years?
19165.75
3. Suppose that you are limited to paying \$375 per month but you want to pay the loan off in 4 years and not 5 years. What is the maximum amount that you can borrow?
16124.64

What are the disadvantages of debt compared to equity?

The disadvantages of debt compared to equity are that money must be repaid, and involves interest. Interest expense raises the company's breakeven point and can cause the company further angst in coming up with ...

#### Solution Summary

This solution discusses the purchase of a new car. It discusses if buyer could meet the payment restriction and finance the amount required for the car, the maximum amount that can be borrowed to meet the payment restriction if the loan is to be paid off in 5 years, and the maximum amount that can be borrowed. It discusses the advantages and disadvantages of debt compared to equity. It also explains how equity and debt securities are classified into three categories. APA references are supplied.

\$2.19