TUTE 3 - Tutorial answers PDF

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1. Leasing increases a company’s access to debt as the lease poses more debt on the firm in which they have to repay the lessor. The lessee or the company has an increase in debt as they now owe the lessor in order to use or buy their asset. 2. There is an after tax cost of borrowing rate and also having to pay interest can make borrowing less advantageous in the long run. With a lease you avoid paying the cost of the asset but still have to pay lease payments. Must pay residual payment value. An advantage is it is cancellable as it is only a short term lease. 3. Lease payment tax shield = 0.3 * 16 150 = + 4 845 Depreciation tax shield = 0.3 * (85 000 /5) = - 5 100 Tax on gain / loss = 0.3* (12 750 -0) = +3 825 Year 0 � +85 000, -16 150, +4845 Year 1 � -16 500, +4845, -5100 Year 2 ““ Year 3 ““ Year 4 ““ Year 5 -5 100, -12750, +3825 After tax-cost of borrowing = 0.15*.7= 0.105 = + $13, 738.10 therefore they should accept the lease contract.

If you hold a lease long term you bear the risk of obsolescence. Discount rate is the opportunity cost....