Instructions
Please complete the following:
Â· Problem P17-4
Â· Problem P17-9
Â· Problem P18-1
Â· Problem P18-15
Â· Problem P19-1
Ca
y all calculations to TWO decimal places to reduce rounding e
or, especially in multi-step problems.
Please only submit one Excel file with tabs for each problem.
There might be some problems where the solution will require graphing. This will require using the graphing function in Excel.
If you submit your answer without an Excel graph points will be deducted.
If you submit your answer by drawing a graph even if it is co
ect, points will be deducted.
Remember to show all calculations. You must show your calculation and solution. please see the example below. If you do not show how you a
ived at your answers, you will not receive credit. Merely showing the formula without the calculations is not sufficient. The problems should be set up in columns or using other appropriate formatsâ€”do not hide all steps in formulas behind one answer. I must still be able to see how you a
ived at the answer. EXAMPLE OF HOW WORK SHOULD LOOK Please see below
Â· Problem P17-4
Leave and Purchase: JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 21% tax
acket, and its after-tax cost of debt is cu
ency 8%. The terms of the lease and of the purchase are as follows:
Lease: Annual end-of-year lease payments of $25,200 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at the termination of the lease.
Purchase: The equipment costs $60,000 and can be financed with a 14% loan requiring annual end-of-year payments of $25,844 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) JLB will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other cost will be borne by the JLB, who plans to keep the equipment and use it beyond its three-year recovery period.
a. Calculate the after-tax cash out-flows associated with each alternative.
. Calculate the present value of each stream, using the after-tax cost of debt.
c. Which alternative lease or purchase would you recommend? why?
Â· Problem P17-9
Conversion ( or stock) value: What is the conversion (or stock) value of each of the following convertible bonds?
a. A $1,000-par-value bond that is convertible into 2.5 shares of the common stock. The common stock is cu
ently selling for $50 per share.
. A $1,000 -par-value bond that is convertible into 12.5 shares of common stock. The common stock is cu
ently selling for $42 per share.
c. A $1,000-par-value bond that is convertible into 100 shares of common stock. The common stock is cu
ently selling for $ 10.50 per share.
Â· Problem P18-1
Tax effects of acquisition: Connors Shoe Company is contemplating the acquisition of Salines Boots, a firm that has shown large operating tax losses over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change from the present level for 15 years. The tax loss ca
y forward of Salinas is $800,000 and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for the application of the tax loss ca
y forward resulting from the proposed merger. The corporate tax rate is 21%.
a. If Connors does not make the acquisition, what will be the companyâ€™s tax liability and earnings after taxes each year over the next 15 years?
. If the acquisition is made, what will be the companyâ€™s tax liability and earnings after taxes each year over the next 15 years?
c. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition, judging on the basis of tax considering? (ignore present value)
Â· Problem P18-15
Voluntary settlement: Payments: Jacobi Supply Company recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm cu
ently has $150,000 in outstanding debts and approximately $75,000 in liquidatable short-term assets. Indicate, for each of the following plans, whether the plan is an extension, a composition, or a combination of the two. Also, indicate the cash payments and timing of the payments required of the firm under each plan.
a. Each creditor will be paid .50 cents on the dollar immediately, and the debts will be considered fully satisfied.
. Each creditor will be paid .80 cents on the dollar in two quarterly installments of .50 cents and .30 cents. The first installment is to be paid in 90 days.
c. Each creditor will be paid the full amount of its claims in three installments of .50 cents, .25 cents, and .25 cents on the dollar. The installments will be made in 60-day intervals, beginning in 60 days.
d. A group of creditors with claims of $50,000 will be immediately paid in full; the rest will be paid .85 cents on the dollar, payable in 90 days.
Â· Problem P19-1
Exchange rate movements: Suppose a basket of goods in Paris costs euro 113 and the same basket purchased in New York costs $153.
a. At what exchange rate between euros and dollars is the cost of the basket of goods the same in each city ?
. Now suppose that over the next year, inflation in France is expected to be 2% while in the U.S. the forecast is for 6% inflation. What exchange rate do you expect a year from today?