You Own a High-Tech Manufacturing Entity

question 221

Multiple Choice

You own a high-tech manufacturing entity. You would like to expand your operations but to do so you need to either lease or buy a $1.2 million piece of equipment for the next three years. The lease payments would be $475,000 a year for the three years. If the equipment is purchased, it will be depreciated straight-line to zero over the three-year period. The equipment will have no residual value at the end of the three years. Should the equipment be leased, the lessor and the lessee will both have marginal tax rates of 34%. The loan rate for your firm for this purpose is 8% pre-tax.

What is the after-tax cost of debt for the lessee?

• A) 4.67%
• B) 5.28%
• C) 7.33%
• D) 8.00%
• E) 10.72%

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Definitions:

Sherman Act

The Sherman Act is a foundational antitrust law in the United States that prohibits monopolistic practices and promotes competition.

Joint Action

A collaborative effort where two or more parties work together towards a common goal, typically in a legal or governmental context.

Section 1

A specific segment or provision within a broader legal document or statute, which would require context to fully understand its implications.

Exclusive Dealing

A contractual arrangement where one party agrees to buy goods from another party on the condition that no goods will be purchased from competitors.