PROBLEMS FOR HOME ASSIGNMENT

1. Leasewell Ltd. has a client who wants to lease equipment worth Rs.100 lakh. Leasewell Ltd. is facing a liquidity crunch and is looking for a loan participant for the lease deal who can finance it to the extent of Rs.30 lakh. The equipment has a useful life of 5 years and its salvage value is expected to be Rs.5 lakh. It can be depreciated at 30% on WDV basis. The company contacted Wellfin Ltd., which agreed to participate in the lease. The terms quoted by Wellfin Ltd. are an interest of 16% and repayments in equal quarterly installments including interest over five years. If the Leasewell Ltd. expects a gross yield of at least 30%, what is the minimum quarterly lease rental that should be quoted to the client? Lease rentals are to be paid in arrears. Leasewell Ltd. is thinking of offering a hire purchase plan to the client if he is willing to make a down payment of Rs.30 lakh. The company wants the hire rentals to be paid monthly in arrears. What is the minimum flat rate of interest that should be quoted to the client if Leasewell Ltd. should not lose on this transaction compared to the above lease transaction? Ignore interest tax. The income tax rate applicable to the company is 30%. 2. Shubhlabh Financial Services Ltd. (SFSL) has a client who wants to lease an equipment that costs Rs.50 lakh. The current lease rate applicable to such leases is Rs.35 ptpm payable annually in arrears. The company is at present not in a position to finance the lease entirely by itself. It is therefore looking for a loan participant to finance at least Rs.10 lakh. The supplier of the equipment is willing to finance it through its finance subsidiary and wants the amount to be repaid over five years with interest at 16%, in equal annual installments (including interest). SFSL wants a gross yield of 25% on this transaction. You are required to advise SFSL whether it should go ahead with this transaction or not. (Support your answer with suitable workings).

3. Epsilon Finance Company offers the following type of Deposit Linked Scheme for acquiring cars. Deposit Scheme 25% Deposit Amount (Rs.) 1,00,000.00 Repayment Period (in months) 36 Equated Monthly Installment (Rs.) (Payable at the end of every month) 3,835.00 Accumulated Interest on Deposit (after 36 months) interest is cumulated with quarterly rests 13,886.40 The company levies a front-ended documentation and service fee of Rs.2,000 and offers a prompt payment bonus of Rs.10 per Rs.10,000 per month on expiry of the repayment period. The EMI is payable at the end of every month.

After 24 months, one of the borrowers (who has borrowed Rs.1,00,000) under the scheme opts for an early settlement. The company levies a service charge of 2% on the principal outstanding on the date of settlement. It offers an interest rebate calculated in accordance with the Rule of 78 method. Calculate the effective rate of interest on the completed transaction. 4. Citi Bank provides car finance on second hand cars up to 70% of the value of the car, if the car is not older than 4 years. Mr. Raghunadhan who wanted to purchase a second hand Maruthi car for Rs.1,70,000 is falling short of Rs.1,00,000 and approached Citi Bank. Citi Bank has appraised his creditworthiness and agreed to finance the car at a flat rate of interest of 16%, repayable in 36 equal monthly installments in arrears. Processing fee payable is Rs.2,000. You are required to a. Find EMI payable by Mr. Raghunadhan b. If Mr. Raghunadhan repays the entire loan after 20 months and city bank provides interest rebate under Rule of 78 and charges 2% of the outstanding principal on prepayments, find the effective rate of interest to Mr. Raghunadhan for the complete transaction. 5. Indusway Limited is considering investment in capital equipment for which the following information is available: Cost of the equipment (inclusive of CST @ 4%) : Rs.21.4 lakh Tax relevant rate of depreciation : 25% Useful life : 5 years Net salvage value at the end of 5 years : 35% of the book value after 5 years The company can either purchase the equipment under the bill rediscounting scheme of IDBI or acquire it on a finance lease. The effective interest rate under the IDBI bill rediscounting scheme is 17.5% p.a. The company has received an offer from Nova Leasing Ltd. to structure a finance lease for a 5-year term at a rental of Rs.28.5 per thousand per month payable annually in arrears. The lease rental has to be calculated on the cost of the equipment to the lessor which will include CST @ 10%. The target debt-equity ratio of Indusway Ltd. is 2:1 and the cost of debt and equity are 17.5% and 22% respectively. The corporate tax rate is 46%. The investment is likely to generate an incremental EBDIT of Rs.20 lakh per annum for the first 3 years and Rs.17 lakh for the last 2 years of the project life. You are required to advise Indusway Ltd. as to whether it should buy or lease the equipment. Also calculate the break even rental for Indusway Ltd.