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.
The solution explains two questions - lease vs buy analysis and calculating the conversion price of bonds