1. What is the minimum lease payment that would make purchasing a computer system and writing a 6-year lease contract on it? The price of the computer system is $175,000, it is a five-year asset for depreciation purposes, it has a residual value of $3,000, it requires $500 maintenance per year, the cost of capital is 9%, and the corporate tax rate is 40%. (Note: MACRS rates for Years 1 to 6 are 0.20, 0.32, 0.19, 0.12, 0.11 and 0.06.)

Question 2)

Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

Question 3)

What is IPO underpricing?

Use the following information for questions 4 and 5

A company is planning to go public. Currently, the pre-IPO value of the firms equity is $95 million, the number of outstanding shares is 3.5 million, the company need to raise $17 million, and the floatation cost of new equity is 12%.

Question 4)

Calculate the gross proceeds needed from an IPO given the above information.

Question 5)

Part a

What is the post-IPO equity value?

Part b

What is the offer price?