Exam 19: Lease and Intermediate-Term Financing

Ajax Capital has determined that the amount to be amortized on an extruder is $540,000.What annual lease payment must Ajax (lessor) require from the lessee if the required rate of return is 16%? Assume that the lease payments will be made at the beginning of each of the 7 years of the lease agreement and that the marginal tax rate is 40%.

What are the disadvantages of leasing?

Paragon Leasing has been approached by Mid-America Trucking Company (MATC) to provide lease financing for a fleet of new tractors.Each tractor will cost $140,000 and will be leased by MATC for 7 years with lease payments made at the beginning of each year.Paragon will depreciate the tractors on a straight-line basis to $0 but the actual market value at the end of 7 years is estimated to be $25,000.What are the required annual beginning-of-year lease payments if Paragon desires to earn a 14% after-tax rate of return? Assume a marginal tax rate of 40%.

Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years.Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0.Actual salvage value is expected to be $8,000 at the end of 4 years.If Wrenn requires a 12 percent after-tax return on the lease, what is the lease payment that Wrenn will require from Contech? Assume a marginal tax rate of 40%.Under the terms of the lease, payments will be made at the beginning of each of the 4 years.

Prime Care has approached the leasing department of First City Bank to arrange lease financing for a $1.2 million CAT scanner.The economic life of the scanner is estimated to be 10 years.The estimated salvage value at the end of 10 years is $0.First City plans to depreciate the scanner on a straight-line basis over 10 years.If First City charges a beginning of the year lease payment of $255,395, what after-tax rate of return will the bank earn on the lease? Assume a marginal tax rate of 40%.

Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing.The period of the lease will be 6 years.The welder will be depreciated under MACRS rules for a 5-year class asset.Medarex's marginal tax rate is 40%.Annual beginning of the year lease payments will be $50,000.Estimated salvage value is zero.If Medarex's after tax cost of borrowing is 15%, compute the net advantage to leasing.(Problem requires MACRS tables.)

What is a term loan?

Sigma Tools will lease a computerized stamping machine from StarBanc.The machine costs $500,000 and will be depreciated on a straight-line basis to a zero book value over the next 5 years, which is also the term of the lease.The expected salvage value in 5 years is $25,000.StarBanc's marginal tax rate is 30 percent and it requires an after- tax rate of return of 12 percent on investments of this type.What annual, beginning of the year, pretax lease payment must StarBanc receive to earn the required 12 percent return?

A primary difference between leveraged leases and other financial leases is that

T.Goho (lessee) wishes to lease a $25,000 car for 5 years.First Union Bank (lessor) has agreed to finance this lease and estimated the car will have a salvage value of $10,000 at the end of the lease.If First Union expects to depreciate the car on a straight-line basis to a salvage value of $0, what monthly lease payments will T.Goho have to make, given that First Union requires a 12% annual rate of return (assume a monthly interest rate of 1%)? Assume a marginal tax rate of 40%, and payments at the beginning of each month.

Lessees with are most likely to use leveraged leases for large transactions.

A sale and leaseback agreement