1. A 9 year, 9.8% coupon bond is callable at 103% of par and does not have call protection. The price of the bond today is $980. You expect rates to fall to 5% at the end of the year. What is your expected one-year rate of return if you buy the bond today?
2. Suppose Clorox can lease a new computer data processing system for $978,000per year for five years.? Alternatively, it can purchase the system for $4.22 million. Assume Clorox has a borrowing cost of 7.3% and a tax rate of 35%?, and the system will be obsolete at the end of five years.
a. If Clorox will depreciate the computer equipment on a? straight-line basis over the next five? years, and if the lease qualifies as a true tax? lease, is it better to lease or finance the purchase of the? equipment?
b. Suppose that if Clorox buys the? equipment, it will use accelerated depreciation for tax purposes.? Specifically, suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%?, 19.2%?, 11.52%?, 11.52%?, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case.