Question 1: A firm can issue an eight-year public debt issue at par with an 11% coupon in the domestic market. It can also issue 11.25% Eurobonds. If all other expenses are equal, which issue offer the firm the lower borrowing cost?
Question 2: A firm is considering leasing a computer system that costs $1,000,000 new. The lease requires annual payments of $135,000 in arrears for 10 years. The lessee pays income taxes at 35% marginal rate. If it purchased the computer system, it could depreciate it to its expected residual value over 10 years. The lessee's cost of similarly secured debt is 10% and its WACC is 15%. Calculate the net advantage to leasing assuming zero residual value. Should the firm lease the computer system? Calculate the net value advantage to leasing assuming $250,000 residual value. Should the firm lease the computer system?
Question 3: New Horizon Natural Foods is considering whether to lease a delivery truck. A leasing company has offered to lease the truck. It cost $35,000. New Horizon has proposed a five-year lease that calls for annual payments of $7,850 at the beginning of each year. New Horizon could duplicate the truck to $5,000 at the end of five years on a straight-line basis and claim depreciation tax deductions at the beginning of each year. It's marginal tax rate is 34%, it cost of five-year secured debt is 10%, and its required return for the project is 12% after tax and 16% pretax.
Should New Horizon lease the truck, or borrow and buy? Suppose instead that New Horizon does not expect to pay income taxes in the foreseeable future. Should New Horizon lease the truck, or borrow and buy?