LIS Company has $50 million in long-term debt, $75 million in shareholder’s equity [both figures are market value basis]. The cost of equity is 14%, cost of long-term debt is 12% and the tax rate is 25%. What is the weighted average cost of capital [WACC] for LIS?
Problem #3: Your firm has just sold non-strategic assets to raise cash for capital investment while avoiding the use of debt. The firm may buy a piece of machinery for $140,000 [with a useful or depreciable life of 4 years]. Your pretax cost of capital is 8% [and your tax rate is 20%]. You can lease the machine for $43,500 per year and the estimated salvage/recovery value at the end of four years [based on actual market data] is $20,000. Should you lease or buy? Explain by showing your work.
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