Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasi
ng. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? (Hint: remember back to our bond pricing concepts and calculate the payment of the bond vs. the lease payment; loan payment - lease payment )
Off balance sheet items are transactions that generate fees for the business (such as guarantees), and to hedge against future loss (such as futures investments).
Meaning assets and liabilities that are deferred or contingent to business success.
When dealing with standalone risk, coefficient of variation is best because it shows the amount by which the asset's returns might deviate from the average returns of the market.
As for portfolio assets that are well diversified, the best measure would be beta because diversified portfolios deal with systematic risk and beta shows the movement of the portfolio in relation to the market and so will show that systematic risk.
