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problem1. Gene's Art Gallery is notoriously known as slow-payer. The firm currently wants to borrow $27900 and only one company will even deal with them. The terms of the loan call for daily payments of $ 97. The first payment is due today. The interest rate is 29 percent, compounded daily. What is the time period of this loan? Suppose a 365 day year.

problem2. Assume the real risk-free rate is 2.50% and the future rate of inflation is expected to be stable at 3.05%. What rate of return would you anticipate on a 5-year Treasury security, supposing the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, employ the arithmetic average.

problem3. 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%. The firm will use the three year MACRS depreciation category (with the associated 4-year prepare off). Assume a tax rate of 35%

a. Evaluate the after tax cost of the lease for 4 years.

b. Evaluate the annual payment for the loan.

c. Evaluate the amortization schedule for the loan. d. Determine the depreciation schedule.

e. Evaluate the after tax cost of borrow-purchase alternative.

f. Evaluate the present value of the after-tax cost of the two alternatives. Use a discount rate of 8%

g. Which alternative must be selected, based on minimizing the present value of after tax costs?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93680

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