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Problem 2 6 - 1 2 Valuing financial leases Imagine yourself in the position of Thomas Pierce III, president of Greymare Bus Lines. Your firm
Problem Valuing financial leases
Imagine yourself in the position of Thomas Pierce III, president of Greymare Bus Lines. Your firm was established by your
grandfather, who was quick to capitalize on the growing demand for transportation between Widdicombe and nearby
townships. The company has owned all its vehicles from the time the company was formed; you are now reconsidering that
policy. Your operating manager wants to buy a new bus costing $ The bus will last only eight years before going to the
scrap yard. You are convinced that investment in the additional equipment is worthwhile. However, the representative of the
bus manufacturer has pointed out that her firm would also be willing to lease the bus to you for eight annual payments of
$ each. Greymare would remain responsible for all maintenance, insurance, and operating expenses. If Greymare does
not own the bus it cannot depreciate it and therefore, it gives up a valuable depreciation tax shield. We assume depreciation
would be calculated immediately. Greymare's borrowing rate is Assume this is a financial lease.
a What is the value of the lease if Greymare's marginal tax rate is
b What would the lease value be if the tax rate is but for tax purposes, the initial investment had to be written off in
equal amounts over years through
Note: For all requirements, a negative answer should be indicated by a minus sign. Do not round intermediate
calculations. Enter your answers in thousands rounded to decimal places.
Answer is complete but not entirely correct.
I need help with A and B please
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