Hybrid Financing
#1

[attachment=8871]
Hybrid Financing
Preferred Stock, Leasing, Warrants, and Convertibles

 Preferred stock
 Leasing
 Warrants
 Convertibles
Leasing
 Often referred to as “off balance sheet” financing if a lease is not “capitalized.”
 Leasing is a substitute for debt financing and, thus, uses up a firm’s debt capacity.
 Capital leases are different from operating leases:
 Capital leases do not provide for maintenance service.
 Capital leases are not cancelable.
 Capital leases are fully amortized.
Analysis: Lease vs. Borrow-and-buy Data:
 New computer costs $1,200,000.
 3-year MACRS class life; 4-year economic life.
 Tax rate = 40%.
 kd = 10%.
 Maintenance of $25,000/year, payable at beginning of each year.
 Residual value in Year 4 of $125,000.
 4-year lease includes maintenance.
 Lease payment is $340,000/year, payable at beginning of each year.
Depreciation schedule
In a lease analysis, at what discount rate should cash flows be discounted?

 Since cash flows in a lease analysis are evaluated on an after-tax basis, we should use the after-tax cost of borrowing.
 Previously, we were told the cost of debt, kd, was 10%. Therefore, we should discount cash flows at 6%.
A-T kd = 10%(1 – T) = 10%(1 – 0.4) = 6%.
Cost of Owning Analysis
Notes on Cost of Owning Analysis

1. Depreciation is a tax deductible expense, so it produces a tax savings of T(Depreciation). Year 1 = 0.4($396) = $158.4.
2. Each maintenance payment of $25 is deductible so the after-tax cost of the lease is (1 – T)($25) = $15.
3. The ending book value is $0 so the full $125 salvage (residual) value is taxed, (1 - T)($125) = $75.0.
Cost of Leasing Analysis
 Each lease payment of $340 is deductible, so the after-tax cost of the lease is
(1-T)($340) = -$204.
 PV cost of leasing (@6%) = -$749.294.
Net advantage of leasing
 NAL = PV cost of owning – PV cost of leasing
 NAL = $766.948 - $749.294
= $17.654
 Since the cost of owning outweighs the cost of leasing, the firm should lease.
Reply

Important Note..!

If you are not satisfied with above reply ,..Please

ASK HERE

So that we will collect data for you and will made reply to the request....OR try below "QUICK REPLY" box to add a reply to this page
Popular Searches: tata motors project download mba financing, hybrid financing in the u s, hybrid financing ppt, project on marksheet generation system of self financing course, consortium on financing higher education, powered by phpbb car financing, financing reports of kmml,

[-]
Quick Reply
Message
Type your reply to this message here.

Image Verification
Please enter the text contained within the image into the text box below it. This process is used to prevent automated spam bots.
Image Verification
(case insensitive)

Forum Jump: