Lease or buy / conversion price
Not what you're looking for?
Please see the attachment.
JLB Corporation is attempting to determing whether to lease or purchase research equipment. The firm is in the 40% tax
bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows:
Lease- Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance costs
will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase
the asset for $5,000 at termination of the lease.
Purchase- The research equipment costing $60,000, can be finance entirely with a 14% loan requiring annual end-of-year
payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under the MACRS using the 3 year
recovery period. The firm will pay $1,800 per year for a service contract that covers all maintenance costs;insurance
and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period.
A. Calculate the after-tax cash outflows associated with each alternative
B. Caluclate the present value of each cash outflow stream, using the after-tax cost of debt.
C. Which alternative-lease or purchase- would you recommend? Why?
Calculate the conversion price for each of the following convertible bonds:
A. A $1,000-par-value bond that is convertible into 20 shares of common stock.
B. A $500-par-value bond that is convertible into 25 shares of common stock
C. A $1,000 par-value bond that is convertible into 50 shares of common stock.
Purchase this Solution
Solution Summary
The solution explains two questions - lease vs buy analysis and calculating the conversion price of bonds
Purchase this Solution
Free BrainMass Quizzes
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.