Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year. What is the break-even rate in this case?

Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year. What is the break-even rate in this case?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 9P

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Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,000 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $200 per desk at the beginning of each year. The cost of capital is 9% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,000 desk. The company has just issued five-year notes at an interest rate of 6% per year. What is the break-even rate in this case?
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