George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $299,140, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. National will pay annual payments of $40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of $180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 8%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

(1) Lease receivable.

(2) Sales price.
(3) Cost of sales.

(b) Prepare a 10-year lease amortization schedule. please state how you get to the values

(c) Prepare all of the lessor’s journal entries for the first year.

A has contracted with B to construct a factory in Oman. The first payment has been received by B and started working for three months. Oman has adopted new regulation relating the security in the factories. This regulation required new materials and changes in the construction of the factory. All of this has raised the price of the actual contract. A has asked be to include the materials and the do the changes according to the new regulation adopted by the government at the same price and conditions according to the contract signed. B has decided to stop the work and asked to renegotiate the contract and the prices. A has no budget to finance the new materials and the changes in the factory and asked B to continue work and do the changes.

.5. What action A should take to make B start work even it doesn’t have the budget for the changes adopted by the government?

6. In your conclusion, you should provide a good solution for A and B to continue to work together and build the factory with the new government requirements.

The value of the marginal product of labor for Panera is VMPL=20-(1/2)L. Panera hires L workers in a competitive labor market and only sells coffee, also in a competitive market. The price of coffee is $2. First, sketch Panera's demand for labor. Clearly label each axis.

What market wage would induce Panera to hire only 4 workers?

Suppose someone provided Panera with an infinite supply of free labor. Panera would not use an infinite number of workers; instead it would use how many workers? (Any more and the boss would complain, “there are too many cooks in the kitchen!”)

If the price of coffee increases to $3, what is the new expression for VMPL? If you believe this change has no effect then explain why.

Relative to a market wage of $12, what effect will a binding minimum wage of $15 have on the average productivity (in cups per worker) at Panera? Increase, decrease, or no effect; or not enough info?

Sanford Corporation expects to have earnings this coming year of $3 per share. Sanford
plans to retain all of its earnings for the next two years. For the subsequent two years, the
firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point
onward. Each year, retained earnings will be invested in new projects with an expected
return of 25% per year. Any earnings that are not retained will be paid out as dividends.
Assume Sanford’s share count remains constant and all earnings growth comes from the
investment of retained earnings. If Sanford’s equity cost of capital is 10%, what price
would you estimate for Sanford stock?

(a) What are the earnings and dividends over the first three years?

(b) At what rate will the earnings and dividends grow in year 4 and 5 s? What are
the dividends at the end of year 4 and 5?

(c) What price would you estimate for Sanford stock?

2) You work for GrubHub delivering takeout to people who ask for delivery. You need to purchase a vehicle and are trying to decide between two choices. The first is a gasoline car that currently sells for $27,500, gets 20 miles to the gallon, has a resale value of $8,500 in 10 years and has maintenance costs of $750 per year. The alternative is an electric car that costs $35,000, has a resale value of $15,000 in 10 years, and has maintenance costs of $500 per year. You expect to drive 12,000 miles per year, and the cost of gasoline is $2.00 per gallon while the price of electricity is $.0666667 per mile. a) Graph the NPV profiles for both cars. (8) b) Which car would you choose? Explain in detail. (8) c) Assume the discount rate is 5%. What would the price of gasoline have to be to make you indifferent between the gas and electric cars?

Sanford Corporation expects to have earnings this coming year of $3 per share. Sanford
plans to retain all of its earnings for the next two years. For the subsequent two years, the
firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point
onward. Each year, retained earnings will be invested in new projects with an expected
return of 25% per year. Any earnings that are not retained will be paid out as dividends.
Assume Sanford’s share count remains constant and all earnings growth comes from the
investment of retained earnings. If Sanford’s equity cost of capital is 10%, what price
would you estimate for Sanford stock?
(a) What are the earnings and dividends over the first three years?

(b) At what rate will the earnings and dividends grow in year 4 and 5 s? What are
the dividends at the end of year 4 and 5?

(c) What price would you estimate for Sanford stock?

Price, Inc., is considering an investment of $372,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $252,000 and $77,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 5 percent. Price will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $52,000 in nominal terms at that time. The one-time net working capital investment of $13,500 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate. What is the project’s total nominal cash flow from assets for each year? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Cash flow Year 0$ =

Year 1 $ =

Year 2 $ =

Year 3 $ =

Year 4 $ =

Year 5 $ =

The following information applies for parts d), e) and f). A company makes an initial public offering of shares to raise $250 million, at an offer price of $3.90 per share. The issue is underwritten at $3.50. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $600,000. The firm’s share price closes at $4.10 on its first day of trade.

d) Calculate the IPO underwriting spread. (1 mark)

e) Calculate the IPO underpricing. (1 mark)

Two years later, the company wants to raise another $28.3 million to finance a new investment project through a seasoned equity offering at $55 per share, and the underwriter charges a 8% spread.

f) How many shares have to be issued through the SEO?

g) Discuss two advantages for firms to raise capital through seasoned equity offerings, as compared with an IPO.

Back from his dream, Matt begins some strategic planning for starting another store in a small town that has no computer store and is not inclined to use mail order buying methods.

1. He believes the annual demand in the town will be P = 1800 – 10Q. First, calculate Matt's marginal revenue curve, and then graph both the demand and MR curves.

2. He estimates his marginal cost per computer to be constant at $600. Sketch on the graph the marginal cost curve. From this data, calculate how much he should sell to maximize profit and what price Matt should charge.

3. If capital costs are fixed at $12,000 for the year what is Matt’s total cost function and his average cost per computer at the optimal output?

4. From the average cost at profit maximum output, show the profit rectangle on your graph above.

5. If Matt were able to perfectly price discriminate, what would be his output and profit?

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The cost of new machinery for the new product line would be $644,000. The machinery has economic life of eight years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the machine. The new line would generate incremental sales of 70,000 units per year at variable cost per unit of $21 and fixed cost of $725,000 per year. Each unit can be sold for $37 in the first year. The sale price and cost are both expected to remain the same. The firm’s tax rate is 35 percent, and the rate of return required for this type of investment is 15 percent. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-10 percent. Calculate the best-case and worst-case NPV.