1. Modern Transportation Corporation (MTC) is a company that acquires
new vehicles and leases them to different customers. MTC is
considering a proposal from a customer who wants to lease 10 specially
equipped delivery trucks for a period of 7 years. The customer is
willing to pay $240,000 (for the 10 trucks) at the end of each year
for 7 years. Annual maintenance costs will be paid by the customer
and MTC will not be responsible for it. At the end of 5 years, MTC
will have to refit all the trucks at a total cost of $100,000. At
the end of the lease period, MTC can sell the 10 trucks for
$1,400,000. At present, MTC can aquire the fleet of 10 trucks for
$2,000,000. If MTC's required rate of return is 9%, should it go
ahead with the deal? Why?
2. New York MTA is planning on upgrading some of the city buses that
it directly operates. Three bus manufacturing companies have put in
bids for the project-- North American Bus Industries, Blue Bird, and
Neoplan AU. For each bus delivered, NABI's bid requires the MTA to
pay $40,000 at the end of each year for four years. Blue Bird's bid
requires MTA to pay $60,000 immediately and a payment of $80,000 after
four years. NeoPlan AU, a French company, requires a payment of
E40,000 immediately, and payments of E40,000 at the end of year one
and year two. (Note "E" stands for the euro). If interest rates are
10% each year, and exchange rates are $1.20/E now and are expected to
be $1.25/E in years one, two, three, and four, which bid should the
MTA accept? Show calculation and steps
3. To fund its expansion, Wal-Mart has decided to issue new 15 year
bonds that have face value of $1,000 and pay 7% coupon. If Wal-Mart
can sell these bonds to investors at $1,100, what is its cost of
borrowing?
4. Wal-Mart can also issue common stock for $48 each. Wal-Mart is
expected to pay dividends of $2.50 next year. Its dividends are
expected to grow at 6% each year. What is the cost of equity
financing?
5. If Wal-Mart decides to use preferred stock financing, it will have
to issue 10% preferred dividend $30 par value preferred stock. It can
sell these at $32. What is its cost of preferred stock financing? |
