Answered step by step
Verified Expert Solution
Question
1 Approved Answer
2022W-T3 BUSI2009 ACCOUNTING FOR DECISION MAKING 01 ASSIGNMENT 4 Problem 1. PURCHASE VERSUS LEASE CALCULATION (7%) Baldwin Co. must decide whether to purchase or lease
2022W-T3 BUSI2009 ACCOUNTING FOR DECISION MAKING 01 ASSIGNMENT 4 Problem 1. PURCHASE VERSUS LEASE CALCULATION (7%) Baldwin Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Questions-Please show your detailed calculations. No grade will be awarded for providing the final number without detailed support to your answer. 1. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount 1. $4,500 2. $3,150 3. $2,205 4. $1,543 5. $1,081 Problem 2. Cost of Capital and Capital Project (8%) GMA Inc. is contemplating spending $25 million to expand its mining operation, a project that is considered to have a reasonable amount of risk. Based on some initial analysis, the project would expand the operation's production output by 18% and provide a 15% return on investment. Before deciding whether to proceed with the venture, the CEO asked the treasurer to determine where the financing would come from and how much each source will cost. The following are the findings of the treasurer: 1 a) $11 million will be funded from common shares. Each share will be sold for $50, yielding $4 in dividends. The flotation costs will be 10%. b) $3 million will be provided from internal sources (retained earnings). c) $1 million will be generated from preferred shares. The expected selling price is $100, and the flotation costs will be $5 per share. An amount of $10 in annual dividends per share will be paid to the preferred shareholders. d) $4 million will be funded by the selling of bond A and $6 million by the selling of Bond B. The cost of Bond A is estimated at 6% and the cost of Bond Bat 8% The company's corporate tax rate is 47%. The treasurer expects the common shares to continue to grow at a rate of 5% per year. Questions-Show your detailed calculations. No grade will be awarded for providing the final number without detailed support to your answer. 1. Calculate the company's cost of capital. 2. Should the CEO approve the expansion program? Why
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started