Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 16: Long-Term Debt and Lease Financing
16A-1. Solution:
Titanic Boat Co.
a. Liquidation value of assets $5,200,000
Liabilities 7,600,000
Difference ($2,400,000)
b. Preferred and common stock will not participate in the
distribution because the liquidation value of the assets does
not cover creditor claims.
c. Asset values in liquidation $5,200,000
Administrative costs, wages and taxes – 400,000
Remaining asset values $4,800,000
d. Remaining asset value $4,800,000
Payment to secured creditors – 600,000
Amount available to unsatisfied secured
claims and unsecured debt $4,200,000
e. Remaining claims of unsatisfied secured debt and
Secured debt (unsatisfied first lien) $ 300,000
Accounts payable 2,800,000
f. Amount available to unsatisfied
$4,200,000
security claims and unsecured debt (part d) 60%
Remaining claims of unsatisfied secured $7,000,000
debt and unsecured debt holders (part e)
==
Chapter 16: Long-Term Debt and Lease Financing
CP16A-1. (Continued)
g.
Allocation procedures for unsatisfied secured claims and
unsecured debt.
(1)
Category
(2)
Amount of
Claim
(3)
Initial
Allocation
(60%)
(4)
Amount
Received
Secured debt
(unsatisfied first lien)
$ 300,000
$ 180,000
$ 180,000
Accounts Payable
2,800,000
1,680,000
1,680,000
Senior unsecured debt
2,200,000
1,320,000
2,200,000
Subordinated
debentures*
1,700,000
1,020,000
140,000*
$ 7,000,000
$4,200,000
$4,200,000
* The subordinated debenture holders must transfer $880,000
of their initial allocation to the senior unsecured debt holders
to fully provide for their payment ($1,320,000 + $880,000 =
$2,200,000). This will leave $140,000 for subordinated
debentures ($1,020,000 – $880,000).
Chapter 16: Long-Term Debt and Lease Financing
CP16A-1. (Continued)
h.
Payments and percent of claims
Category
Total amount
of claim
Amount
received
Percent of
claim
satisfied
Secured debt
(first lien)
$ 900,000
$ 780,000
86.7%
Accounts
payable
2,800,000
1,680,000
60.0%
Senior
unsecured
debt
2,200,000
2,200,000
100.0%
Subordinated
debentures
1,700,000
140,000
8.2%
16B-1. Lease versus purchase decision (LO4) 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.
a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round 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 due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a
discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of
aftertax costs?
Chapter 16: Long-Term Debt and Lease Financing
16B-1. Solution:
Howell Auto Parts
a. (1) (2) (3) (4)
Year
Payment
Tax Shield
35% of (1)
After tax
Cost
1
$2,600
$ 910
$1,690
2
$2,600
910
1,690
3
$4,600
1,610
2,990
4
$4,600
1,610
2,990
Chapter 16: Long-Term Debt and Lease Financing
16-41
d. Depreciation Depreciation
Year
Base
Percentage
Depreciation
1
$10,000
.333
$ 3,330
2
10,000
.445
4,450
3
10,000
.148
1,480
4
10,000
.074
740
$10,000
e.
(1)
(2)
(3)
(4)
(5)
(6)
Year
Payment
Interest
Depreciation
Total Tax
Deductions
Tax
Shield
35% × (4)
Net After
Tax Cost
(1) – (5)
1
$3,293
$1,200
$3,330
$4,530
$1,586
$1,707
2
3,293
949
4,450
5,399
1,890
1,403
3
3,293
668
1,480
2,148
752
2,541
4
3,293
353
740
1,093
383
2,910
CP16B-1. (Continued)
f.
Year
Aftertax
cost of
leasing
PV
Factor
at 8%
Present
Value
Aftertax
cost of
Borrow-
Purchase
PV
factor
at 8%
Present
Value
1
$1,690
.926
$1,565
$1,707
.926
$1,581
2
1,690
.857
1,448
1,403
.857
1,202
3
2,990
.794
2,374
2,541
.794
2,018
4
2,990
.735
2,198
2,910
.735
2,139
$7,585
$6,940
Chapter 16: Long-Term Debt and Lease Financing
16-42
g. The borrow and purchase decision has a lower present value
