Question 15

Pinder Ltd needs a machine for its business. The machine costs $130,000 and has an expected life of 10 years. After the 10 years, the machine is expected to have a salvage value of $15,000. Pinder Ltd can borrow at 8% per annum from the bank to buy this machine. Alternatively, Pinder Ltd can also lease the machine for 10 years. The lease payment would be $16,000, payable in advance. The tax rate for Pinder Ltd is 35%, and the machine will be fully depreciated using a straight line method over its expected life. Which of the following values is closest to the incremental cash flow from leasing in year 5?

Group of answer choices

$-14,950

$-18,950

$-16,950

$-20,950

$-22,950

Question 16

Assume that Pinder Ltd operates in a world under the assumptions of Modigliani and Miller. Pinder Ltd has no debt, has 1 million shares outstanding that are trading for $2 per share. Sean, Pinder Ltd's CFO, suggests that the company borrow money to repurchase shares. This way, the rate of return on equity will be higher as long as the rate of return on assets is greater than the cost of borrowing. Sean proposes that the company borrow $0.95 million to repurchase 0.475 million shares. Mary, the CEO of Pinder Ltd, points out that if shareholders borrow on their own, the overall effect will be the same. Since Mary is the CEO, Sean's proposal does not pass. Susan, who holds 3 shares in Pinder Ltd, likes Sean's idea and decides to borrow money to invest in additional shares of Pinder Ltd so that her investment outcome is identical to Sean's proposal. Assume that it is possible to buy fractional shares if necessary. Which of the following values is closest to the amount that Susan will borrow?

Group of answer choices

$6.93

$5.93

$4.93

$6.43

$5.43