Problem 1: Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. If the company purchases the equipment for $1,000,000, it will depreciate it over 5 years, using straight-line depreciation. If the company enters into a 5-year lease, the lease payment is $210,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 10 percent.
a. Calculate the cost of purchasing the equipment.
b. Calculate the cost of leasing the equipment.
Problem 2: Shown below are exchange rates for several currencies. The rates are shown as indirect rates from the standpoint of a U.S. company.
Euro Swiss Franc Mexican Peso
Spot rate 0.90 1.70 11.00
30-day forward rate 0.92 1.80 10.95
60-day forward rate 0.93 1.85 10.70
1. Is the euro appreciating or depreciating against the U.S. dollar? Why?
2. Is the Swiss franc appreciating or depreciating against the U.S. dollar? Why?
3. Is the Mexican peso appreciating or depreciating against the U.S. dollar? Why?
4. Using cross-rates, how many francs will the euro buy, how many pesos will the franc buy, and how many euro will the peso buy?
Problem 3: Describe the current economic and financial condition we are facing today. How will the current economic and financial condition impact the future growth of the businesses? If you were raising funds from outside (today) to support the growth of a company, why would you use warrants in debt financing. Explain how your financing strategy will increase the wealth of the stockholders.
Problem 4: What is bankruptcy? What is the difference between liquidation and reorganization? What is the main benefit of reorganization?
Problem 5: What is a merger? How does a merger differ from other forms of acquisition?
Problem 6: Explain how differing inflation rates between two countries affect their exchange rates over the long-term.