Question

Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carryforwards. Thus, Quartz’s effective tax rate is zero. Quartz plans to lease equipment from New Leasing Company. The term of the lease is five years. The purchase cost of the equipment is $840,000. New Leasing Company is in the 35 percent tax bracket. There are no transaction costs to the lease. Each firm can borrow at 10 percent.
a. What is Quartz’s reservation price?
b. What is New Leasing Company’s reservation price?
c. Explain why these reservation prices determine the negotiating range of the lease.



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  • CreatedAugust 28, 2014
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