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Lease or buy / conversion price

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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.

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Solution Summary

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

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