Question

ABC Corp. is considering leasing an asset from XYZ Corp. Here are the relevant facts:

Asset cost$1,000,000,000

Depreciation scheduleYearPercentage

120%

232%

319.20%

411.52%

511.52%

65.76%

Lease term6 Year

Lease payment$200,000 per year (Annuity due from years 0 - 5)

Asset residual valueZero

Tax ratesABC = 0%

XYZ = 40%

Interest costsABC = 10%

XYZ = 7%

Show that it will be advantageous for both ABC to lease the asset and for XYZ to purchase the asset in order to lease it out to ABC.

Find the maximum rental which ABC will pay and the minimum rental which XYZ will accept.

The firm whose financials are illustrated in the following spreadsheet wishes to maintain cash balances of 80 over the next five years. It also desires neither to issue additional stock nor to make any changes in its current level of debt. As a result, dividends are the plug in the balance sheet. Model this situation (note that for some parameter levels you may get “negative dividends,” indicating that there is no sustainable level of dividends).