ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 13

million in two years and maintaining the remaining $50 million in
perpetuity.
Assume that in both plans TO will be able to borrow at the risk-free
interest rate; that all proceeds are
paid out to equity holders and that in Plan 2 the reduction in debt is
financed by issuing equity.
Corporate tax rate is 35% and there are no other markets
imperfections.
b. Which of these two plans would you recommend? Explain.
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lease agreement for production equipment
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Multiple Choice
1. On January 1 of the current year, Tire Company enters into a five-
year lease agreement
for production equipment. The lease requires Tire Co to pay $12,500
per year in lease
payments. At the end of the five-year lease term, Tire Co can
purchase the equipment
for $30,000. The fair value of the equipment $75,000. The estimated
useful life of the
equipment is 10 years. The present value of the lease payments is
$50,000. The present
value of the purchase option is $20,000. Tire’s controller believes the
purchase option
price is sufficiently below the expected fair value of the equipment at
the date the
option becomes exercisable to reasonably assure its exercise. Tire Co
would normally
depreciate equipment of this type using the straight-line method.
What amount is the
carrying value of the asset related to this lease at December 31, of the
current year?
A. $40,000