Pfizer bonds are selling in the market for $1095.60. These 8 year semi-annual bonds pay 3.6% on
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| Pfizer bonds are selling in the market for $1095.60. These 8 year semi-annual bonds pay 3.6% on an annual basis on a $1,000 par value. If the | ||||||
| bond is purchased at market price, what is the bond's yield to maturity? | ||||||
| Semi-Annual Rate | Annualized Rate | Annual Rate (not semi-annual) | ||||
| The capital structure for Capital Health is provided below. If the firm has a 8% after tax cost of long term debt, 12% commerical loan rate, 6% commerical paper rate, | ||||||||||
| short term bond rate of 5%, a 9% cost of preferred stock, and an 15% cost of common stock, what is the firm's weighted average cost of capital (WACC)? | ||||||||||
| #2 | #3 | |||||||||
| Capital Structure (in K's) | Weights | Individual Costs | Weighted Costs | |||||||
| Long Term Bonds | $ 3,000 | 8.00% | ||||||||
| Commercial Loans | $ 2,845 | 12.00% | ||||||||
| Commercial Paper | $ 1,500 | 6.00% | ||||||||
| Short Term Bonds | $ 1,200 | 5.00% | ||||||||
| Preferred Stock | $ 500 | 9.00% | ||||||||
| Common Stock | $ 4,500 | 15.00% | ||||||||
| #1 | = | #4 | =WACC |
| Recovery Centers of America needs to acquire new vehicles that will cost $2.5 million across its six state service area. | |||||||||||||||
| It plans to use the vehicles for three years, at which time new vehicles will be acquired. The company can obtain a 3.49 percent bank loan to buy | |||||||||||||||
| the vehicles or it can lease the vehicles for three years. Assume that the following facts apply to the decision: | |||||||||||||||
| - The vehicles fall into the five-year class for tax depreciation, so the MACRS allowances are 0.2, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1 through 6, respectively. | |||||||||||||||
| - The company's marginal tax rate is 28 percent. | |||||||||||||||
| - Tentative lease terms call for payments of $550,000 at the end of each year. | |||||||||||||||
| - The best estimate for the value of the vehicles after three years of wear and tear is $1,350,000. | Tax Rate | Year | Allowance | ||||||||||||
| 28% | 1 | 20% | |||||||||||||
| 2 | 32% | ||||||||||||||
| a. What is the NAL and IRR of the lease? | 3 | 19% | |||||||||||||
| b. Should the organization buy or lease the equipment? | 4 | 12% | |||||||||||||
| 5 | 11% | ||||||||||||||
| 6 | 6% | ||||||||||||||
| Year 0 | Year 1 | Year 2 | Year 3 | ||||||||||||
| Cost of owning: | ($2,500,000) | ||||||||||||||
| Net purchase price | |||||||||||||||
| Depreciation tax savings | |||||||||||||||
| Residual value | |||||||||||||||
| Tax on residual value | |||||||||||||||
| Net cash flow | -$2,500,000 | ||||||||||||||
| Cost of leasing: | |||||||||||||||
| Lease payment | |||||||||||||||
| Tax savings from lease | |||||||||||||||
| Net cash flow | |||||||||||||||
| Net advantage to leasing: | Before Tax Cost of Debt (BTCD) | ||||||||||||||
| PV cost of leasing | -$1,130,766.50 | 3.49% | |||||||||||||
| PV cost of owning | -$936,010.52 | ||||||||||||||
| a. | NAL | After Tax Cost of Debt (ATCD) | |||||||||||||
| 2.51% | |||||||||||||||
| Internal rate of return of the lease: | |||||||||||||||
| Leasing cash flow | |||||||||||||||
| Owning cash flow | |||||||||||||||
| Incremental cash flow | |||||||||||||||
| IRR | |||||||||||||||
| b. | |||||||||||||||
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