Grand Canyon FIn450 module 6 assignment

The firm will pay $1,800 per year for a service contract that covers all

maintenance costs; insurance and other costs will be borne by the firm. The firm

plans to keep the equipment and use it beyond its 3-year recovery period.

a. Calculate the after-tax cash outflows associated with each alternative.

b. Calculate the present value of each cash outflow stream, using the after-tax cost

of debt.

c. Which alternative—lease or purchase—would you recommend? Why?

Problem 17-6

Lease-versus-purchase decision Joanna Browne is considering either leasing or

purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested

retail price (MSRP) of $33,000. The dealership offers a 3-year lease that requires a

capital payment of $3,300 ($3,000 down payment 1 $300 security deposit) and

monthly payments of $494. Purchasing requires a $2,640 down payment, sales tax

of 6.5% ($2,145), and 36 monthly payments of $784. Joanna estimates that the

value of the car will be $17,000 at the end of 3 years. She can earn 5% annual interest

on her savings and is subject to a 6.5% sales tax on purchases.

Make a reasonable recommendation to Joanna using a lease-versus-purchase

analysis that, for simplicity, ignores the time value of money.

Calculate the total cost of leasing.

b. Calculate the total cost of purchasing.

c. Which should Joanna do?

Problem 17-8

Conversion price Calculate the conversion price for each of the following

convertible bonds:

a. A $1,000-par-value bond that is convertible into 20 shares of common stock.

b. A $500-par-value bond that is convertible into 25 shares of common stock.

A $1,000-par-value bond that is convertible into 50 shares of common stock.

Problem 17-14

Determining values: Convertible bond Craig’s Cake Company has an outstanding

issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible

into 80 shares of common stock. They have a 13% annual coupon interest

rate, whereas the interest rate on straight bonds of similar risk is 16%.

Calculate the straight bond value of this bond.

b. Calculate the conversion (or stock) value of the bond when the market price is

$9, $12, $13, $15, and $20 per share of common stock.

c. For each of the common stock prices given in part b, at what price would youexpect the bond to sell? Why?

d. Make a graph of the straight value and conversion value of the bond for each common stock price given. Plot the per-share common stock prices on the x axis and the bond values on the y axis. Use this graph to indicate the minimum market value of the bond associated with each common stock price.

Problem 17-19

Common stock versus warrant investment Tom Baldwin can invest $6,300 in the

common stock or the warrants of Lexington Life Insurance. The common stock is

currently selling for $30 per share. Its warrants, which provide for the purchase of

two shares of common stock at $28 per share, are currently selling for $7. The stock

is expected to rise to a market price of $32 within the next year, so the expected theoretical

value of a warrant over the next year is $8. The expiration date of the warrant

is 1 year from the present.

a. If Mr. Baldwin purchases the stock, holds it for 1 year, and then sells it for $32,

what is his total gain? (Ignore brokerage fees and taxes.)

b. If Mr. Baldwin purchases the warrants and converts them to common stock in

1 year, what is his total gain if the market price of common shares is actually

$32? (Ignore brokerage fees and taxes.)

c. Repeat parts a and b, assuming that the market price of the stock in 1 year is

(1) $30 and (2) $28.

d. Discuss the two alternatives and the trade-offs associated with them.

Problem 17-21

Call option Carol Krebs is considering buying 100 shares of Sooner Products, Inc.,

at $62 per share. Because she has read that the firm will probably soon receive certain

large orders from abroad, she expects the price of Sooner to increase to $70 per

share. As an alternative, Carol is considering purchase of a call option for 100

shares of Sooner at a strike price of $60. The 90-day option will cost $600. Ignore

any brokerage fees or dividends.

a. What will Carol’s profit be on the stock transaction if its price does rise to $70

and she sells?

b. How much will Carol earn on the option transaction if the underlying stock price

rises to $70?

c. How high must the stock price rise for Carol to break even on the option transaction?

d. Compare, contrast, and discuss the relative profit and risk associated with the

stock and the option transactions.