1. High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $70,000 for five years, due at the beginning of each year. This machine will save Farmer $20,000 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $355,000. This machine will save $30,000 per year in electricity costs. A local bank has offered to finance the machine with a $355,000 loan. The interest rate on the loan will be 9 percent on the remaining balance and will require five annual principal payments of $71,000. Farmer has a target debt-to-asset ratio of 67 percent. Farmer is in the 30 percent tax bracket. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis.
a. What is the NAL of leasing?
b. How much debt is displaced by this lease?
2. Mitsy inventory systems Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $40. At the close of business the day before the ex-rights day , the company's stock sells for $80 per share . The next morning , you notice that the stock sells for $60 per share and the rights sell for $3 each.
1- What price should the stock sell for ex-rights?
2- What is the value of the rights?
3- Are the rights underpriced or overpriced?
4 What is the amount of instant profit you can make on ex rights day per new share?