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Chapter 5: Q1P-c (page 542)

Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be \(10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of \)2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan鈥攄ue to rounding.)

Short Answer

Expert verified

The loan amount repaid in the first year is $2,092, in the second year is $2,343, in the third year is $2,624, and in the fourth year is $2,939.

Step by step solution

01

Information provided in the question

Annual payment of loan =$3,292

Lease term = 4 years

Interest rate = 12%

02

Amortization schedule

Year

Beginning balance

Annual payment

Annual interest

Repayment on principal

Ending

balance

1

$10,000

$3,292

$1,200

$2,092

$7,908

2

$7,908

$3,292

$949

$2,343

$5,565

3

$5,565

$3,292

$668

$2,624

$2,941

4

$2,941

$3,292

$353

$2,939

$2

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Most popular questions from this chapter

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 12 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 35 percent and will eventually reach 58 percent during the maturity stage (IV).

a Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage.

Stage I

\(0.10

Stage II

\)1.80

Stage III

\(2.80

Stage IV

\)3.70

b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor鈥檚 after-tax income from the cash dividend?

c. In what two stages is the firm most likely to utilize stock dividends or stock splits?

The Hastings Sugar Corporation has the following pattern of net income each year and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.

Year

Net income

Profitable capital expenditure

1

\(14 million

\)7 million

2

\(16 million

\)11 million

3

\(12 million

\)6 million

4

\(16 million

\)8 million

5

\(16 million

\)9 million

The Hastings Corporation has 3 million shares outstanding. (The following questions are separate from each other.)

a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years?

b. If the firm simply uses a payout ratio of 30 percent of net income, how much in total cash dividends will be paid?

c. If the firm pays a 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

d. Assume the payout ratio in each year is to be 20 percent of the net income and the firm will pay a 10 percent stock dividend in years 2 through 5, how much will dividends per share for each year be? (Assume the cash dividend is paid after the stock dividend.)

In what way is an investment banker a risk taker?

What is the purpose of market stabilization activities during the distribution process?

Why has corporate management become increasingly sensitive to the desires of large institutional investors?
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