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CHAPTER 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles Preferred stock Leasing Warrants Convertibles 20­1 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. 20­2 Analysis: Lease vs. Borrow­ and­buy Data: New computer costs $1,200,000. 3­year MACRS class life; 4­year 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. 4­year lease includes maintenance. Lease payment is $340,000/year, payable at beginning of each year. 20­3 Depreciation schedule Depreciable basis = $1,200,000 MACRS Depreciation End­of­Year Year Rate Expense Book Value 1 0.33 $ 396,000 2 0.45 540,000 3 0.15 180,000 4 0.07 84,000 $804,000 264,000 84,000 0 1.00 $1,200,000 20­4 In a lease analysis, at what discount rate should cash flows be discounted? Since cash flows in a lease analysis are evaluated on an after­tax basis, we should use the after­tax cost of borrowing. Previously, we were told the cost of debt, kd, was 10%. Therefore, we should discount cash flows at 6%. A­T kd = 10%(1 – T) = 10%(1 – 0.4) = 6%. 20­5 ... - tailieumienphi.vn
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