1. To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240. What is the the Year 1 cost of owning? [Hint: Be sure to consider interest expenses, maintenance costs, and deprecation.]
a. $208
b. $1168
c. -$80
d. $1072
2. Which of the following statements is CORRECT?
a. The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.
b. A firm's business risk is determined solely by the financial characteristics of its industry.
c. A firm's financial risk can be minimized by diversification.
d. One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.