FINA 301

TUTORIAL ASSIGNMENT 7

2012

A lessor has an unlevered beta of .08, leverage of 90%, and a debt premium of 0.90%. In addition, a Miller tax world operates, the risk free rate is 5.41%, the market risk premium in the tax-adjusted version of the CAPM is estimated at 7%, and the corporate tax rate is 28%. (a) If the lessor grants a financial lease to firm X for a two year period over an asset costing $10m for the lessor, with lease payment L now and in one year, and a GRV of $1m, determine the value for L in a competitive leasing market.

(b) If firm X has a borrowing rate of 7% and could also purchase the asset for $10m and (if they purchased it) would obtain the same salvage value in two years as the lessor, what would the gain from leasing over 100% debt financing of the asset purchase be? (c) Redo (b) subject to the lessee having a borrowing rate of 8% rather than 7%.

(d) Redo (b) subject to the firm X receiving a salvage value of $0.3m less than the lessor would have obtained. Hint: the lower salvage value will increase the depreciation deductions that firm X would have obtained if it purchased the asset rather than leasing it. (e) Redo (b) subject to firm X having to pay $10.5m in the event of purchasing the asset ($0.5m more than the lessor would have paid). Hint: the higher purchase price will increase the depreciation deductions that firm X would have obtained if it purchased the asset rather than leasing it. Assume depreciation is 40% DV. Redo (e) subject also to the NPV of the project associated with the acquisition of the asset being -$0.7m under normal financing.

(f)