Khaleesi Corporation (“Khaleesi”) leases dragonglass weapons to customers. She g
ID: 2335605 • Letter: K
Question
Khaleesi Corporation (“Khaleesi”) leases dragonglass weapons to customers. She gains a loyal following of customers because dragonglass is of limited supply but high demand due to its usefulness for the upcoming winter. Further, Khaleesi tends to offer more favorable financing terms than competitors offering substitutive products (e.g., Lannister, LLC).
Khaleesi was recently approached by the Lords of the North, Inc. (“the North”) which is interested in leasing a substantial stock of weapons over a potentially lengthy period of time. The North has indicated a willingness to pay any rate that Khaleesi Corporation demands for its dragonglass products, but generally receives an interest rate of 12% on all other borrowing transactions. The North’s management are a very noble group, so payments are reasonably assured. Further, there are no material cost uncertainties.
Khaleesi has gathered its council to discuss entering into such a contract with the North and has invited you to provide financial council. Khaleesi’s board has proposed several alternative sets of lease terms (below) and would like you determine what the North’s annual payments will be under each scenario, if payments are made at the beginning of the period.
A
B
C
Fair value of weapons to be leased
$365,760
$365,760
$365,760
Lease Term
11 years
11 years
6 years
Useful Life of leased assets
13 years
13 years
6 years
Desired rate of return
10%
10%
13%
Residual Value (guaranteed)
$0
$24,350
$24,350
Prepare a lease amortization schedule describing the pattern of payments and interest over the lease term for both Khaleesi and the North.
A
B
C
Fair value of weapons to be leased
$365,760
$365,760
$365,760
Lease Term
11 years
11 years
6 years
Useful Life of leased assets
13 years
13 years
6 years
Desired rate of return
10%
10%
13%
Residual Value (guaranteed)
$0
$24,350
$24,350
Explanation / Answer
1. Given In question
Fair Value of assets=365760
N=11 year
Desired interest rate =10%
Calculation of annual lease payment in option
=Fair value of assets -Residual Value/(1+desired Interest rate)n
(1-(1/(1+Desired interest rate)n)/Desired interest rate
=365760/6.495
=56314
2.Calculation of Annual lease payment Under 2nd option
Here given
Given In question
Fair Value of assets=365760
N=11 year
Desired interest rate =10%
Residual value=24350
Calculation of annual lease payment in option
=Fair value of assets -Residual Value/(1+desired Interest rate)n
(1-(1/(1+Desired interest rate)n)/Desired interest rate
=(365760-8553)/6.495
=55000
3. Caculation under 3rd option
Given In question
Fair Value of assets=365760
N=6 year
Desired interest rate =13%
Residual Value=24350
Calculation of annual lease payment in option
=Fair value of assets -Residual Value/(1+desired Interest rate)n
(1-(1/(1+Desired interest rate)n)/Desired interest rate
=88570
Year Value of lease asstes Installment Interest payment lease value payment 1 365750 56,314.00 36,575.00 19,739.00 2 346011 56,314.00 34,601.00 21,713.00 3 324298 56,314.00 32,430.00 23,884.00 4 300414 56,314.00 30,041.00 26,273.00 5 274141 56,314.00 27,414.00 28,900.00 6 245241 56,314.00 24,524.00 31,790.00 7 213451 56,314.00 21,345.00 34,969.00 8 178482 56,314.00 17,848.00 38,466.00 9 140016 56,314.00 14,002.00 42,312.00 10 97704 56,314.00 9,770.00 46,544.00 11 51160 56,314.00 5,154.00 51,160.00Related Questions
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