Homework

HOMEWORK 6

Exercise21-3

Priorto commencing doing calculations in order to determine the bestalternative, it is critical for Rob to consider the followingfactors the useful life of a new ambulance, the cost of new tiresand new fuel pump, useful life of the repaired ambulance, cost ofcapital, federal and state income tax rate, and all the conditions oflease including any hidden charges.

Thebest alternative would be purchasing a new ambulance. Purchasing of anew ambulance may seem to be costly in the short run, but will beless expensive at long run. This is because purchasing a newambulance would eliminate the costs associated with maintenance andrepair since the new ambulance would be in good condition. Besides,it is better to consider purchasing a new ambulance since the newambulance will have a long useful life. In addition, the efficiencyassociated with a new ambulance is high. Hence, since in the long runa new ambulance will have cost saving effects associated withmaintenance and repair, it is better to purchase a new ambulancerather than repair or lease an ambulance.

Exercise21-1

Costof owning

PVFactor = 1/(1 + r)n

Year0 Year 1Year 2 Year 3Year 4 Year 5

NetCash Flow (48,750) 2,500 2,500 2,500 2,5005,000

Presentvalue factor 10.910.83 0.75 0.68 0.62

Presentvalue(48,750)2,272.7 2,066.1 1,878.3 1,707.53,104.6

Presentvalue of owning(48,750) 2,2752,0751,875 1,7003,100

Costof leasing

Year0Year 1Year 2 Year 3 Year 4 Year 5

NetCash flow (8,250) (8250) (8250)(8250)(8250) –

PVfactor 10.91 0.830.75 0.68 0.62

Presentvalue (8250) (7500) (6818) (6198)(5635) –

PVcost of leasing(8250) (7508) (6848) (6188) (5610)

Thebest alternative is to own rather than leasing this is because, thecost of owning is less compared to the cost of leasing. In caseinterest rate was 6% instead of 10%, the alternative will remain thesame.

Exercise20-1

Thecompanies that would be compared having different capital structureinclude Walmart, AT&ampT Inc., and Apple Incl. All the threecompanies have a mix of debt as well as equity in their capitalstructure. In Walmart, the retailer’s total debt is $56.6 billion.The debt as a percentage of equity is 69.6% and debt to total assetsas a percentage is 27.7%. For the Apple Company, the total debt toequity ratio is 31.64%, while total debt to assets is 15.22%. On theother hand, AT&ampT. Inc has a debt to equity ratio of 95.02%, whilethe debt to assets ratio is 28.03%. The percentage annual interest isrevealed in the notes to the financial statements. The interest ratecan be considered to be fair and equitable because it has beenrevealed in the financial statement notes.

AT&ampTFinancial Statement

WalmartFinancial Statement

AppleFinancial Statement

References

Baker,J. J., &amp Baker, R. W. (2011). Healthcare finance: Basic tools for nonfinancial managers.Sudbury, Mass: Jones and Bartlett Publishers.