4.12 Review Questions: Chapter Four (101/92) -- Corporate Finance

4.12 Review Questions: Chapter Four Review Questions: Chapter Four - In what manners are Operating Leases and Capital Leases accounted for differently? - In what three ways can a firm pay for a capital asset acquisition? - You are given the following Capital Lease information. Calculate the value of the capitalized asset and lease obligation on the Balance Sheet. Construct your own template. - HIZ, Inc. is going to lease some equipment for 3 years at an annual charge of $400,000 – payable at the end of each year. - There will be no salvage value - HIZ’ borrowing rate is 5%. - Amortize the liability balance for each of the three years. Solution to Questions #3 #4: Year 0: PV = ($400,000) (2.7232) = $1,089,280 (Opening Liability Balance) Year 1: (0.05) ($1,089,280) = $54,464 (Interest) $400,000 (Payment) minus $54,464 = $345,536 (Amortization) $1,089,280 – 345,536 = $743,744 (Liability Balance) Year 2: (0.05) ($743,744) = $37,187 (Interest) $400,000 – 37,187 = $362,813 (Amortization) $743,744 – $362,813 = $380,931 (Liability Balance) Year 3: (0.05) ($380,931) = $19,047 (Interest) $400,000 – $19,047 = $380,953 (Amortization) $380,931 – $380,953 ≈ 0 (Final Liability Balance – with small rounding error)