A) Mining company can purchase a drilling machine for GH¢ 50,000. It also has the option to lease the drilling machine for GH¢12,200 a year for a 5-year period. The expected life of the machine is given as 5 years and expected to have a salvage value of GH¢5000 in 5 years’ time. The mining company intends to buy the drilling machine a fair market value at that time. If the mining company decides to buy the machine, it can acquire financing at 20%. The tax rate is 34%. Assume depreciation is on straight line basis and lease rentals are tax deductible. Would you advice the mining company to lease the asset? (Assume payment is made at the end of the year)
B) The Government of Ghana is in the process of issuing a 4-year bond which has a coupon rate of 15%. The Face value is GH¢1m per bond. The Government pays interest semi-annually. The company’s cost of capital is 20% per annum. a. Advice the company on how much they should pay for the bond b. Calculate the duration of the bond. c. If the bonds were issued by a private company, would you be prepared to buy the same amount as in (a). Justify your position.