Big Bear

In: Business and Management

Submitted By spencercraft515
Words 472
Pages 2
“The Bear Minimum”
Case 08-4

Blakely Broom
Connor Greco
Spencer Craft

Big Bear Power, a widely held public utility company, has agreed to a 10-year non-cancelable lease of a combustion turbine from Goliath Co. The lease was signed on December 15, 2010, and begins on January 1, 2011. The lease requires Big Bear to pay $1 million of legal fees incurred by Goliath, and third party legal fees as part of the lease. The lease also states that if a change in control event occurs, Big Bear must purchase the equipment leased from Goliath Co. within 30 days at a price equal to the remaining lease payments. This provision also indicates that a change in control also requires Big Bear to pay a penalty of $500,000. The last provision describes the rental payments, which are directly related to CPI. One of the first issues involved in calculating the present value of the minimal lease payments is figuring out what type of lease this is. This includes figuring out what the present value of the minimum rental payments are, the guaranteed residual value after the lease term ends, penalty for failure to renew or extend, and bargain purchase options, if any. Once we figure this we add the executory costs included in the payments to the minimal lease payments and calculate the present value by using the discount rate. Since this is a non-cancelable lease and it passes the final criterion mentioned in section 840-10-25-1, in that the minimum lease payments exceeds 90% the fair value of the property, we labeled this as a capital lease. In calculating the present value of the minimum rent payments we used the current national discount rate, and figured the annual payments by increasing them incrementally based upon the fluctuation in CPI. Also in computing the present value, we used the annuity due process since the payments are due at the beginning of each month. Since Big…...

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