1. James Messan Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 5 years. The firm will depreciate the cost of the tools on a straight-line basis over their 5-year life. It can borrow $4,500,000, the purchase price, at 15% and buy the tools, or it can make 5 equal end-of-year lease payments of $1,500,000 each and lease them. The loan obtained from the bank is a 5-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 $850,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?
2. alinas, Smith & Silguero Corporation is financing an ongoing construction project. The firm will need $2,000,000 of new capital during each of the next 3 years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 60% debt and 40% equity, and it wants to be at that structure in 3 years, when the project has been completed. Debt flotation costs for a single debt issue would be 2.6% of the gross debt proceeds. Yearly flotation costs for 3 separate issues of debt would be 3.5% of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?
3. Teoli, Hoang and Johnson Co. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual "breakeven rate"?