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Differences Between Leasing and Borrowing

Calculate book value and market value of debt, equity, and company. Calculate WACC using book value and market value. Discuss the relevance of market and book value weights in calculating WACC.

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Added on  2022-12-12

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This article discusses the key differences between leasing and borrowing, including tax deductibility, ownership, depreciation, and more. It also explores whether they are perfect substitutes. The article concludes with a recommendation on whether to lease or borrow equipment based on the net present value (NPV) analysis.

Differences Between Leasing and Borrowing

Calculate book value and market value of debt, equity, and company. Calculate WACC using book value and market value. Discuss the relevance of market and book value weights in calculating WACC.

   Added on 2022-12-12

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Question 1
Solution 1
a) Book value of debt
=Book value of bond 1+ Book value of bond 2
=860,000,000+1,270,000,000
=2,130,000,000
b) Book value of equity
=BV of equity per share * Outstanding shares
=12.15*141900000
= 1,724,085,000
c) Book value of the company
= Book value of debt + Book value of equity
=2,130,000,000+1,724,085,000
=3,854,085,000
d) Market value of debt
=Face value * price at par
=Market value of bond 1+ Market value of bond 2
=860,000,000*0.94347+1,270,000,000*0.96643
= 2,038,750,300
Differences Between Leasing and Borrowing_1
e) Market value of equity
=Stock Price * Outstanding shares
=78.56*141900000
= 11,147,664,000
f) Market value of company
= Market value of debt + Market value of equity
=2,038,750,300+11,147,664,000
= 13,186,394,300.00
Solution 2
a) WACC using Book Value
WACC =Weight Debt * cost of debt *(1 – T) + Weight equity *cost of equity (Lumen
Learning Courses, 2019)
Weight Debt
=2,130,000,000/3,854,085,000= 55.27%
Weight Equity
= 1,724,085,000/3,854,085,000 =44.73%
Cost of Debt
=39.80%*3.045%+60.20%*2.965% =2.997%
Cost of equity using CAPM
Re = Rf+ Beta*(Rm –Rf)
=0.03%+1.380*7.5%
Differences Between Leasing and Borrowing_2
=10.38%
WACC=55.27%*2.997%*(1-30%)+44.73%*10.38%
= 5.8%
b) WACC using market value
WACC =Weight Debt * cost of debt *(1 – T) + Weight equity *cost of equity+
Weight Debt (Lumen Learning Courses, 2019)
=2,038,750,300/13,186,394,300= 15.46%
Weight Equity
=11,147,664,000/13,186,394,300=84.54%
Cost of Debt
=39.80%*3.045%+60.20%*2.965% =2.997%
Cost of equity using CAPM
Re = Rf+ Beta*(Rm –Rf)
=0.03%+1.380*7.5%
=10.38%
WACC=15.46%*2.997%*(1-30%)+84.54%*10.38%
= 9.1%
Differences Between Leasing and Borrowing_3

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