FIN 550 GCU Week 7 Lease and Hybrid Financing Case Paper & Sheet The purpose of this assignment is to explain core concepts related to lease vs. purchase a

FIN 550 GCU Week 7 Lease and Hybrid Financing Case Paper & Sheet The purpose of this assignment is to explain core concepts related to lease vs. purchase and tactical financial decisions.

Read the Mini Case . Using complete sentences and academic vocabulary, please answer questions a through f.

APA format is not required, but solid academic writing is expected.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

Mini Case

Lewis Securities Inc. has decided to acquire a new market data and quotation system for

its Richmond home office. The system receives current market prices and other information

from several online data services and then either displays the information on a screen

or stores it for later retrieval by the firm’s brokers. The system also permits customers to

call up current quotes on terminals in the lobby.

The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term

loan for the full purchase price at a 10% interest rate. Although the equipment has a

6-year useful life, it is classified as a special-purpose computer and therefore falls into the

MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could

be obtained at a cost of $20,000 per year, payable at the beginning of each year. The

equipment would be sold after 4 years, and the best estimate of its residual value is

$200,000. However, because real-time display system technology is changing rapidly, the

actual residual value is uncertain.

As an alternative to the borrow-and-buy plan, the equipment manufacturer

informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline

lease on the equipment, including maintenance, for payments of $260,000 at the

beginning of each year. Lewis’s marginal federal-plus-state tax rate is 40%. You have

been asked to analyze the lease-versus-purchase decision and, in the process, to answer

the following questions:

a. (1) Who are the two parties to a lease transaction?

(2) What are the five primary types of leases, and what are their characteristics?

(3) How are leases classified for tax purposes?

(4) What effect does leasing have on a firm’s balance sheet?

(5) What effect does leasing have on a firm’s capital structure?

b. (1) What is the present value of owning the equipment? (Hint: Set up a time line that

shows the net cash flows over the period t 0 to t 4, and then find the PV of

these net cash flows, or the PV cost of owning.)

(2) Explain the rationale for the discount rate you used to find the PV.

c. What is Lewis’s present value of leasing the equipment? (Hint: Again, construct a

time line.)

d. What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis

should buy or lease the equipment? Explain.

e. Now assume that the equipment’s residual value could be as low as $0 or as high as

$400,000, but $200,000 is the expected value. Because the residual value is riskier than

the other relevant cash flows, this differential risk should be incorporated into the

analysis. Describe how this could be accomplished. (No calculations are necessary, but

explain how you would modify the analysis if calculations were required.) What effect

would the residual value’s increased uncertainty have on Lewis’ lease-versus-purchase

decision?

f. The lessee compares the present value of owning the equipment with the present

value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how

should you analyze the decision to write or not to write the lease? Course Code
FIN-650
Class Code
FIN-650-O500
Criteria
Content
Percentage
100.0%
Question A
15.0%
Question B
15.0%
Question C
15.0%
Question D
15.0%
Question E
15.0%
Question F
15.0%
Mechanics of Writing (includes spelling,
punctuation, grammar, language use)
10.0%
Total Weightage
100%
Assignment Title
Mini Case 8
Unsatisfactory (0.00%)
Answer to question A is not included.
Answer to question B is not included.
Answer to question C is not included.
Answer to question D is not included.
Answer to question E is not included.
Answer to question F is not included.
Surface errors are pervasive enough that they impede
communication of meaning. Inappropriate word choice or
sentence construction is used.
Total Points
30.0
Less than Satisfactory (74.00%)
Answer to question A is incomplete or incorrect.
Answer to question B is incomplete or incorrect.
Answer to question C is incomplete or incorrect.
Answer to question D is incomplete or incorrect.
Answer to question E is incomplete or incorrect.
Answer to question F is incomplete or incorrect.
Frequent and repetitive mechanical errors distract the
reader. Inconsistencies in language choice (register) or word
choice are present. Sentence structure is correct but not
varied.
Satisfactory (79.00%)
Answer to question A is included but lacks explanation and
relevant supporting details.
Answer to question B is included but lacks explanation and
relevant supporting details.
Answer to question C is included but lacks explanation and
relevant supporting details.
Answer to question D is included but lacks explanation and
relevant supporting details.
Answer to question E is included but lacks explanation and
relevant supporting details.
Answer to question F is included but lacks explanation and
relevant supporting details.
Some mechanical errors or typos are present, but they are
not overly distracting to the reader. Correct and varied
sentence structure and audience-appropriate language are
employed.
Good (87.00%)
Answer to question A is complete and includes relevant
supporting details.
Answer to question B is complete and includes relevant
supporting details.
Answer to question C is complete and includes relevant
supporting details.
Answer to question D is complete and includes relevant
supporting details.
Answer to question E is complete and includes relevant
supporting details.
Answer to question F is complete and includes relevant
supporting details.
Prose is largely free of mechanical errors, although a few may
be present. The writer uses a variety of effective sentence
structures and figures of speech.
Excellent (100.00%)
Answer to question A is extremely thorough and supported
with substantial relevant details.
Answer to question B is extremely thorough and supported
with substantial relevant details.
Answer to question C is extremely thorough and supported
with substantial relevant details.
Answer to question D is extremely thorough and supported
with substantial relevant details.
Answer to question E is extremely thorough and supported
with substantial relevant details.
Answer to question F is extremely thorough and supported
with substantial relevant details.
Comments
Writer is clearly in command of standard, written, academic
English.
Points Earned

Purchase answer to see full
attachment