1) Widgets Manufacturing needs an essential piece of equipment for its operations. It can purchase it...

 

Transcribed Image Text:

1) Widgets Manufacturing needs an essential piece of equipment for its operations. It can purchase it for $2 million that will last for 10 years and will cost $30,000 per year to operate. Alternatively, it can lease the equipment for 5 years for $350,000 per year. Its cost of capital is 8%. Which should it choose and why? A) Lease because its EAA of -$350,000 is greater. B) Lease because its NPV of -$1,397,449 is greater. Purchase because its EAA of -$342,768 is greater. D) Purchase because its EAA of -$328,059 is greater. E) Purchase because its NPV of -$1,700,000 is greater. 2) A C-Corporation with $5 million in pre-tax profits pays 75% of its net income in dividends. The corporate tax rate is 21%, and the personal dividend tax rate is 10%. What is the total tax paid on the earnings? A) $1,550,000 B) $1,346,250 $1,445,000 D) $1,148,750 $1,050,000 3) Pines Tree Doctors competes in the tree removal industry. Based on the following financial information about Pines and the industry average, what ratio should it target to improve its return on equity (ROE)? Net Income Sales Pines Tree Doctors $300,000 Industry $8 billion Assets $2,000,000 $1,500,000 $60 billion $36 billion A) Increase its profit margin to 15%. B) Increase its total asset turnover to 1.48. Increase its equity multiplier to 2. D) Decrease its total asset turnover to 1.67. E) Decrease its equity multiplier to 2. Equity $500,000 $12 billion 1) Widgets Manufacturing needs an essential piece of equipment for its operations. It can purchase it for $2 million that will last for 10 years and will cost $30,000 per year to operate. Alternatively, it can lease the equipment for 5 years for $350,000 per year. Its cost of capital is 8%. Which should it choose and why? A) Lease because its EAA of -$350,000 is greater. B) Lease because its NPV of -$1,397,449 is greater. Purchase because its EAA of -$342,768 is greater. D) Purchase because its EAA of -$328,059 is greater. E) Purchase because its NPV of -$1,700,000 is greater. 2) A C-Corporation with $5 million in pre-tax profits pays 75% of its net income in dividends. The corporate tax rate is 21%, and the personal dividend tax rate is 10%. What is the total tax paid on the earnings? A) $1,550,000 B) $1,346,250 $1,445,000 D) $1,148,750 $1,050,000 3) Pines Tree Doctors competes in the tree removal industry. Based on the following financial information about Pines and the industry average, what ratio should it target to improve its return on equity (ROE)? Net Income Sales Pines Tree Doctors $300,000 Industry $8 billion Assets $2,000,000 $1,500,000 $60 billion $36 billion A) Increase its profit margin to 15%. B) Increase its total asset turnover to 1.48. Increase its equity multiplier to 2. D) Decrease its total asset turnover to 1.67. E) Decrease its equity multiplier to 2. Equity $500,000 $12 billion

Answer rating: 100% (QA)

Answer 1 To decide between leasing and purchasing we can calculate the Equivalent Annual ... View the full answer