Question 1 As a part of credit analysis, you want to evaluate the financial statements of grekon Limited and kieting Limited for the year 2018. Before starting financial statement analysis, you need to go through the audit report of the companies. Based on your own reading and analysis of audit opinion, is it worthwhile to evaluate financial statements of the above companies? Justify your opinion. [2+2 = 4 marks] [Check Blackboard assessment folder for a copy of the annual reports].
Part b
Hack Wellington Co. (HWC) is considering the purchase of new manufacturing equipment that will cost $15,000 (including shipping and installation). HWC can take out a four-year, $15,000 loan to pay for the equipment at an interest rate of 3.60%. The loan and purchase agreements will also contain the following provisions: . The annual maintenance expense for the equipment is expected to be $150. . The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System's (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. . The corporate tax rate for HWC is 35%. Note: Hack Wellington Co. (HWC) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual loan payment will be: Annual tax savings from maintenance will be: Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation Net cash flow Thus, the net present value (NPV) cost of owning the asset will be: -$10,347 OOO -$21,927 -$9,847 O $12,5205. The lessor's lease evaluation Aa Aa There are two parties in any lease contract-the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor's decision is either to purchase and lease-out the asset, or not make the investment at all. Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee. From the following statements, identify the steps involved in lease analysis from a lessor's perspective. Check all that apply. Determine the lease payments minus income taxes and any maintenance expenses that the lessor must incur as per the lease agreement Determine the invoice price of the leased equipment plus any lease payments made in advance Determine the net cash outlay of the lease agreement Check and ensure that the NPV of the lease remains negative Pele Corp. is a professional leasing company. The leasing manager has to evaluate some lease agreements under the following conditions: . The company's marginal federal-plus-state income tax rate is 30%. . The company has alternative investment options of similar risk that yield 5.50%
