Use the Following Information to Answer the Question(s)below

question 6

Multiple Choice

Use the following information to answer the question(s) below.
Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then the effective after-tax lease borrowing rate is closest to:

• A)8.0%.
• B)12.8%.
• C)15.4%.
• D)4.55%.

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Definitions:

Destroy Money

Refers to actions taken by central banks to reduce the amount of money in circulation, often through selling securities, which can help control inflation.

Create Money

To create money refers to the process by which the central bank or other banking institutions increase the money supply through activities like lending, purchasing securities, or printing currency.

M1

A category of the money supply that includes currency in circulation and checkable deposits in banks.

Bond Prices

The amount of money a bond is bought or sold for in the market, which can fluctuate based on interest rates and the bond's credit rating.