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Solving Q 1- 4

Question #5 The ABC Company CFO is considering leasing equipment rather than purchasing new equipment. The equipment budget for 2020 is $55,000,000. The company uses a 10% weighted average cost of capital. The current longtenn debt nancing interest rate is 5% and the company tax rate is 50%. The equipment is depreciated over 10 years for accounting purposes while the tax rules allow the equipment to be depreciated equally over two years. The present value of the tax depreciation benet is $23,865,000- A lessor has agreed to provide a lease for the equipment to the company for $5,800,000 per year before taxes for 10 years (assume a tax rate of 50%)- There is $5,000,000 of residual value at the end of the lease. The lease debt would be booked as a longterm obligation along with a longtenn asset. Required: (1) Prepare an analysis of whether a lease is advantageous compared to a purchase and nancing of the $55,000,000 of equipment. (10 marks) (2) What are two (2) potential benets to consider in the leasing decision and, if the lease debt was the best option, is there a covenant issue to be negotiated? {4 marks) (3) Describe the advantage to the company regarding the difference in the depreciation timing under accounting rules versus tax rules for a $55,000,000 purchase. (3 marks) (4) How does the concept of match term funding apply in the decision process of the CFO? How does it compare to the forecasted nancing strategy for 2020