SourcesofFinancing

Case:NationalRailroad
PassengerCorporation(Amtrak):
AcelaFinancing
1

BNCYFs
LeveragedLease
proposal

Borrow

Government
Funding
2

BenefitstoLessee
Leasing100%
financing

Offerscashflow
benefits

Offbalancesheet
financing

Avoidanceofloan
covenants

Taxplanning

Creationof
workingcapital

Hedgeagainstrisk
ofinflationand
obsolescence

Fastandflexible
financing

Toovercome
monopolyact

Usedinnon
prioritysectorand
servicesector

Possibilityof
evadingcapital
expenditures

Toavoidcapital
approval
procedures

CreatingMoreValueforLease
Taxratedifferences
betweenlessorand
lessee

Realizingdepreciation
deductionbylessorand
lessee

Assetacquisitionand
maintenancecost
specializationorscaleof
economies

Realizingsalvagevalues
superiorityof
propertyknowledge

Leverageabilities
betweenlessorand
lessee differencein
interestdeductibility

Littleoptionsholding
significantvalue

Lessorcanpurchase
equipmentmorecost
effectively;tax
deductionsforInterest
andDepreciation

Tailoredtomeet
lessorsneeds heavier
paymentsinDecthanin
June

BenefitstoLessor
Additional
financial
product

Reducesrisk

Increases
profitability

Accelerates
sales

Higher
leverage[Max.
of10:1]

Nogestation
period

Lowcostof
operations
5

Income Statement (Values in Millions of USD)

Fiscal Year Ending Sept. 30
1994
1995
1996
1997
1998
Revenues
Passenger-related and other
Commuter
Reimbursable
Federal payments
Total revenues
Expenses
Salaries, wage and benefits
Train operations
Facility and office related
Maintenance-of-way goods and services
Advertising and sales
Interest
Depreciation and amortization
Other
One-time charges/(gains)
Total expenses
Operating income/(loss)
Exclude federal payments and related interest
Operating loss restated
Federal grants
Federal operating grant
Excess railroad retirement taxes
Federal capital - interest
Federal capital - progressive overhaul and other
Total federal grants
Net loss

82
13
5

79
14
7

78
15
7

80
14
5

100

100

100

100

61
11
4
24
100

94
25
11
3
6
13
17
6
-17
159
-59

83
21
11
5
6
10
15
2

79
21
12
4
7
10
15
2

78
22
11
3
6
10
14
2

63
16
8
2
4
8
13
1

154
-54

149
-49

146
-46

-59

-54

-49

-46

115
-15
25
-41

25
11

26
10

18
8

36
-18

2
28
-21

13
8
3
2
27
-19

36
-23

9
6
4
19
-22

11

Balance Sheet (Values in Million of USD)

Fy Ending
Fy Ending
Sept 30, 1998 Sept 30, 1998
Current Assets
Cash and equivalents
274.7
4
Temporary cash investments
409.7
6
Account receivable, net
88.7
1
Mtaerials and supplies
91.6
1
Other current assets
3.4
0
Total current assets
868.1
12
Property, plant and equipment
9456.4
129
Less: Accumulated depreciation
-3106.9
-43
Net property, plant and equipment
6349.5
87
Other assets and deffered charges
87.6
1
Total assets
7305.2
100
13

EquipmentFunding
No. Cost Aggregate Cost
High-speed locomotives 15 7,161,300 107,419,500
Train sets
20 32,129,050 642,581,000
Total 750,000,500
19

TermsofBorrowing
Majorbank
offeredto
underwriteabond

Term:20year

Coupon:6.75
percentper
annum

Semiannual
payments:
$12.303million
22

TermsofBorrowing
Paymentbeginning:
Dec1999

Collateralfortheloan:
locomotivesand
trainssets

Drawback
Hadrecentlyissueddebt
Publicmarketmight
alreadybesaturatedwith
Amtrakpaper
23

BNY Capital Funding LLC's Proposed Leveraged-Lease Strcuture

LeveragedLease

Lessee
Equipment

Equity investors put up $53.6

million (20% of equipment value)
in exchange for lease payments
after debt service

Equity Investor
BNY Capital Funding, LLC

Lease Payments

Proposedby:BNCYF
(Whollyownedsubsidiary
oftheBankofNewYork)
Lenders advance $214.3
million (80% of equipment
value) in exchange for
first claim on lease
payments on locomotives
and trains ets

Owner Trustee
Wilmington Trust

Lender
Export Development
Corporation (EDC) of
Canada

Lessor:BNCYF(BNCYF:
20%ofrequiredfunds;
wouldreceivelease
paymentsonlyafter
debtorhadbeenpaid)
Solelenderanddebt
provider:Export
DevelopmentCorporation
(EDC)ofCanada(EDC:
80%ofrequiredfunds)

24

LeveragedLease
Equityanddebt
fundsonclosing
wouldflowthrough
WilmingtonTrust..,

Anindependentthirdpartytothetransaction
Actedasownertrustee
Rentalpaymentswouldflowsthrough
WoulddistributethepaymentstoeitherEDCor
BNCYF

Amtrak..,

Attheendofleaseterm,couldbuyequipment
fromBNCYFathigherterminalfairmarketvalue
Hadanearlybuyoutoption,couldacquirethe
equipmentfromBNCYFin2017for$126.6
million

25

FederalSources
Couldusefederal
moniestofund
equipment
purchases

Congressmandated
nottousefederal
subsidiesfor
operatingexpenses

Congressagreedto
fundforcapital
appropriations

Federalgrants
consideredas
premiumand
preciouscommodity
26

RelyonFederalSources

Preferredtousegrantmoneytofund
capitalprojectsthatcouldnotbe
easilyandcosteffectivelyfinanced
suchas..,
Safety
Rightofway
Infrastructurerelatedprojects
Majoroverhauls

Trainsetsandotherrollingstock,
couldbeveryefficientlyfinanced
throughcapitalmarkets

27

BNY Capit al Funding LLC's Proposed

Lease- Payment Schedule ( in Dollars)
Dat e Due
Amount
1 999
June
.
Dec
$200,1 02
2000
June
$3,761 ,228
Dec
$7,965 ,65 2
2001
June
$1 0,022,5 94
Dec
$1 0,31 6,948
2002
June
$8,61 7,634
Dec
$1 0,360,645
2003
June
$9,828,5 70
Dec
$1 0,367,985
2004
June
$8,607,823
Dec
$1 0,41 8,5 73
2005
June
$9,683,063
Dec
$1 0,435 ,1 86
2006
June
$8,5 80,1 5 1
Dec
$1 1 ,5 99,993
2007
June
$7,338,339
Dec
$1 1 ,468,21 1
2008
June
$9,475 ,208
Dec
$1 5 ,792,709
2009
June
$7,765 ,741
Dec
$20,224,322
201 0
June
$5 ,067,035
Dec
$1 5 ,872,5 5 6
201 1
June
$4,1 21 ,823
Dec
$22,807,1 29
201 2
June
$3,336,5 87
Dec
$23,645 ,1 33
201 3
June
$2,662,91 3
Dec
$24,05 5 ,367
201 4
June
$1 ,95 7,91 9
Dec
$20,01 7,608
201 5
June
$6,067,61 3
Dec
$6,287,65 2
201 6
June
$1 2,292,31 5
Dec
$21 ,394,788
201 7
June
$6,5 5 1 ,924
Dec
$1 8,1 07,1 67
201 8
June
$8,61 2,1 33
Dec
$1 3,469,295
201 9
June
$8,864,5 43
Dec
$6,65 4,238
2020
June
$2,035 ,748
Dec
$1

28

FinancialLease
Totallease
rental>asset
price

Leaseperiod=
lifeofasset

Purpose:
financingan
asset

Alsocalled
capitallease

Irrevocableby
bothparties
Lesseebears:
maintenance,
insurance,taxes

31

FinancialLease
Minleaserental=rate~
equaltolesseemarginal
costofdebt

Payoutwillinclude;
assetcost,costof
financing,lessor
overhead,rateofreturn

Similartomortgage
loans

32

TestforCapitalizingLease
Ownershiptest:
ownershiptransferred
tolesseeattheendof
lease

Alternativeownership
test:lesseehasrightto
buyassetataprice
substantiallybelowfair
marketprice

Economiclifetest:lease
term>=75%of
estimatedeconomiclife
oftheasset

Valuetest:PVof
minimumlease
payment>=90%offair
marketvalueofassetat
thetimeoflease
33

OperatingLease
Nofixedfuture
commitment

Cancelableby
lesseeonnotice

Purpose:using
anasset

Lessorbears:
maintenance,
insurance,taxes
34

TypesofFinancialLeases
Directleases Lessor
purchasedequipment
orassetandrentedit
outtolessee

Saleandleaseback

Crossborder
(international)lease

Leveragedleases

Foreigntoforeign
lease

35

AssetsSuitableforLeveragedLease
Airplane

Satellites

Ships

Rails

Offshore
drinking

Nuclear
machines

Power
generation
plants

Large
chemical
plants

Gaspipelines

Loan is secured by first lien in the equipment by an assignment of leased equipment

36
and leased rental payments

Basicdocumentsusedin
LeveragedLease
Participationagreement
signedbyallparties

Trustagreement

Indenturetrust

Leaseagreement for
taxshieldassociated
withassetownership
andresidualvalueof
asset
37

DirectLease
Hybridof
operatingand
financiallease

Payoutwillnot
include;Repairs,
Maintenance,and
Taxes

Duration:3or
moreyears

Lessorholdsthe
title

Atexpiration:
lesseemayrenew
orpurchase

Fullpayout

38

TypesofLeases
Masterlease:blanket
leasing

Percentagelease:flat
rental+additional
rentaloverand
abovearevenue

Wetanddrylease
usedinairline
industry

Triplenetlease net
ofinsurance,
maintenance,taxes.
39

TypesofLeases
Closedendandopen
endlease ownership
possibilitiesopenedto
lessee

Swaplease
exchangeassetsin
needofmajorrepairs

Fullpayoutlease

Truelease fullygoes
withthelocalrules
andregulationsofa
country
40

TypesofLeases
Washlease tax
benefittransferred
toinvestor

Upgradelease
usedin
obsolescence

Capitallease to
transferownership
tolesseeattheend
ofleaseterm

Employeelease
transferring
employeestoLessor
andleasingitback
41

Leasevs.Buying
Increasescompanysdebt
capacity

Publicmarketissaturated
withAmtrakdebt

Alsoincludesinterest
component

Investorswillnotrecognizea
financialleaseliabilityasa
formofdebt?Liabilities:PV
offinancialleasepayments
andAssets:PVoffinancial
leasepayments

Possibilityofincreasingbook
incomebuyavoiding
depreciationandinterest?
Leasepaymentsincludes
depreciationandinterest

Inworldofnotaxes;leasing=
borrowandbuy

Leaseamounthigheror
lowerindifferencepoint
wouldresultinvalue
destructionforbothparties

42

NPVAnalysisofLease

Cashflows

Discountrate

Outflow:leasepayments
Notaxshieldsonleasepayments
Amtrakhasnotaxbenefits
Notentitledforresidualvalueof
$40.2million

WACC:11.8%
Interestrate:6.75% appropriate
ratetobeused

43

Cash Flow Analysis of Lease Alternative (in Million Dollars)

Discount rate
Tax rate
After-tax interest rate
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
NPV of Lease Alternative

6.75%
0.00%
6.75%
0

1
(0.20)
0.00
(0.20)

2
(3.76)
0.00
(3.76)

3
(7.97)
0.00
(7.97)

4
(10.02)
0.00
(10.02)

5
(10.32)
0.00
(10.32)

6
(8.62)
0.00
(8.62)

7
(10.36)
0.00
(10.36)

8
(9.83)
0.00
(9.83)

9
(10.37)
0.00
(10.37)

10
(8.61)
0.00
(8.61)

(0.20)
(0.19)
11
(10.42)
0.00
(10.42)

(3.76)
(3.52)
12
(9.68)
0.00
(9.68)

(7.97)
(7.21)
13
(10.44)
0.00
(10.44)

(10.02)
(8.78)
14
(8.58)
0.00
(8.58)

(10.32)
(8.74)
15
(11.60)
0.00
(11.60)

(8.62)
(7.06)
16
(7.34)
0.00
(7.34)

(10.36)
(8.21)
17
(11.47)
0.00
(11.47)

(9.83)
(7.54)
18
(9.48)
0.00
(9.48)

(10.37)
(7.69)
19
(15.79)
0.00
(15.79)

(8.61)
(6.18)
20
(7.77)
0.00
(7.77)

(10.42)
(7.23)
21
(20.22)
0.00
(20.22)

(9.68)
(6.50)
22
(5.07)
0.00
(5.07)

(10.44)
(6.78)
23
(15.87)
0.00
(15.87)

(8.58)
(5.39)
24
(4.12)
0.00
(4.12)

(11.60)
(7.05)
25
(22.81)
0.00
(22.81)

(7.34)
(4.31)
26
(3.34)
0.00
(3.34)

(11.47)
(6.52)
27
(23.65)
0.00
(23.65)

(9.48)
(5.21)
28
(2.66)
0.00
(2.66)

(15.79)
(8.41)
29
(24.06)
0.00
(24.06)

(7.77)
(4.00)
30
(1.96)
0.00
(1.96)

(20.22)
(10.07)
31
(20.02)
0.00
(20.02)

(5.07)
(2.44)
32
(6.07)
0.00
(6.07)

(15.87)
(7.40)
33
(6.29)
0.00
(6.29)

(4.12)
(1.86)
34
(12.29)
0.00
(12.29)

(22.81)
(9.95)
35
(21.39)
0.00
(21.39)

(3.34)
(1.41)
36
(6.55)
0.00
(6.55)

(23.65)
(9.65)
37
(18.11)
0.00
(18.11)

(2.66)
(1.05)
38
(8.61)
0.00
(8.61)

(24.06)
(9.19)
39
(13.47)
0.00
(13.47)

(1.96)
(0.72)
40
(8.86)
0.00
(8.86)

(20.02)
(7.15)
41
(6.65)
0.00
(6.65)

(6.07)
(2.10)
42
(2.04)
0.00
(2.04)

(6.29)
(2.10)
43
(0.00)
0.00
(0.00)

(12.29)
(3.98)
44

(21.39)
(6.70)
45

(6.55)
(1.98)
46

(18.11)
(5.30)
47

(8.61)
(2.44)
48

(13.47)
(3.69)
49

(8.86)
(2.35)
50

(6.65)
(1.71)

(2.04)
(0.50)

(0.00)
(0.00)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(220.26)

44

Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy

Cash Flow Analysis of Borrow-and-Buy Alternative (In Million Dollars)

6.75%
0.00%
6.75%
25
0
1
2
3
4
5
6
7
8
267.90
(267.90)
(3.26)
(3.37)
(3.49)
(3.60)
(3.72)
(3.85)
(3.98)
(4.11)
(9.04)
(8.93)
(8.82)
(8.70)
(8.58)
(8.45)
(8.32)
(8.19)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

10

(4.25)
(8.05)
0.00
0.00

(4.40)
(7.91)
0.00
0.00

(12.30)
(11.90)
11
(4.55)
(7.76)
0.00
0.00

(12.30)
(11.51)
12
(4.70)
(7.60)
0.00
0.00

(12.30)
(11.14)
13
(4.86)
(7.45)
0.00
0.00

(12.30)
(10.77)
14
(5.02)
(7.28)
0.00
0.00

(12.30)
(10.42)
15
(5.19)
(7.11)
0.00

(12.30)
(10.08)
16
(5.37)
(6.94)
0.00

(12.30)
(9.75)
17
(5.55)
(6.76)
0.00

(12.30)
(9.43)
18
(5.73)
(6.57)
0.00

(12.30)
(9.13)
19
(5.93)
(6.38)
0.00

(12.30)
(8.83)
20
(6.13)
(6.18)
0.00

(12.30)
(8.54)
21
(6.33)
(5.97)
0.00

(12.30)
(8.26)
22
(6.55)
(5.75)
0.00

(12.30)
(7.99)
23
(6.77)
(5.53)
0.00

(12.30)
(7.73)
24
(7.00)
(5.31)
0.00

(12.30)
(7.48)
25
(7.23)
(5.07)
0.00

(12.30)
(7.23)
26
(7.48)
(4.83)
0.00

(12.30)
(7.00)
27
(7.73)
(4.57)
0.00

(12.30)
(6.77)
28
(7.99)
(4.31)
0.00

(12.30)
(6.55)
29
(8.26)
(4.04)
0.00

(12.30)
(6.33)
30
(8.54)
(3.76)
0.00

(12.30)
(6.13)
31
(8.83)
(3.48)
0.00

(12.30)
(5.93)
32
(9.13)
(3.18)
0.00

(12.30)
(5.73)
33
(9.43)
(2.87)
0.00

(12.30)
(5.55)
34
(9.75)
(2.55)
0.00

(12.30)
(5.37)
35
(10.08)
(2.22)
0.00

(12.30)
(5.19)
36
(10.42)
(1.88)
0.00

(12.30)
(5.02)
37
(10.77)
(1.53)
0.00

(12.30)
(4.86)
38
(11.14)
(1.17)
0.00

(12.30)
(4.70)
39
(11.51)
(0.79)
0.00

(12.30)
(4.55)
40
(11.90)
(0.40)
0.00

(12.30)
(4.40)
41

(12.30)
(4.25)
42

(12.30)
(4.11)
43

(12.30)
(3.98)
44

(12.30)
(3.85)
45

(12.30)
(3.72)
46

(12.30)
(3.60)
47

(12.30)
(3.49)
48

(12.30)
(3.37)
49

(12.30)
(3.26)
50

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

40.19
40.19
7.64

Sums

(102.97)

(73.88)

(53.01)

(38.04)

7.64

(260.26)

46

NPVAnalysisofLeasevs.Borrowand
Buy
NPVofinterestand
principalrepayment
cashflowsdiscounted
bycostofdebtwill
resultincostofdebt

DifferenceinNPV

Residualvalueclaimof
Amtrakattheendof25
years

Leasingissuperior
cheaperby$40million

47

NPVAnalysisofLeasevs.
BorrowandBuy
No Tax
Lease

Tax Rate of 38%

-$220.26 million -$173.90 million

Borrow-and-buy -$260.26 million -$171.51 million

49

Cash Flow Analysis of Lease Alternative (in Million Dollars)

Discount rate
Tax rate
After-tax interest rate
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ KD
NPV of Lease Alternative

6.75%
38.00%
4.19%
0

1
(0.20)
0.08
(0.12)

2
(3.76)
1.43
(2.33)

3
(7.97)
3.03
(4.94)

4
(10.02)
3.81
(6.21)

5
(10.32)
3.92
(6.40)

6
(8.62)
3.27
(5.34)

7
(10.36)
3.94
(6.42)

8
(9.83)
3.73
(6.09)

9
(10.37)
3.94
(6.43)

10
(8.61)
3.27
(5.34)

(0.12)
(0.12)
11
(10.42)
3.96
(6.46)

(2.33)
(2.24)
12
(9.68)
3.68
(6.00)

(4.94)
(4.64)
13
(10.44)
3.97
(6.47)

(6.21)
(5.72)
14
(8.58)
3.26
(5.32)

(6.40)
(5.77)
15
(11.60)
4.41
(7.19)

(5.34)
(4.72)
16
(7.34)
2.79
(4.55)

(6.42)
(5.56)
17
(11.47)
4.36
(7.11)

(6.09)
(5.16)
18
(9.48)
3.60
(5.87)

(6.43)
(5.34)
19
(15.79)
6.00
(9.79)

(5.34)
(4.34)
20
(7.77)
2.95
(4.81)

(6.46)
(5.14)
21
(20.22)
7.69
(12.54)

(6.00)
(4.68)
22
(5.07)
1.93
(3.14)

(6.47)
(4.94)
23
(15.87)
6.03
(9.84)

(5.32)
(3.98)
24
(4.12)
1.57
(2.56)

(7.19)
(5.27)
25
(22.81)
8.67
(14.14)

(4.55)
(3.27)
26
(3.34)
1.27
(2.07)

(7.11)
(5.00)
27
(23.65)
8.99
(14.66)

(5.87)
(4.05)
28
(2.66)
1.01
(1.65)

(9.79)
(6.61)
29
(24.06)
9.14
(14.91)

(4.81)
(3.18)
30
(1.96)
0.74
(1.21)

(12.54)
(8.12)
31
(20.02)
7.61
(12.41)

(3.14)
(1.99)
32
(6.07)
2.31
(3.76)

(9.84)
(6.11)
33
(6.29)
2.39
(3.90)

(2.56)
(1.55)
34
(12.29)
4.67
(7.62)

(14.14)
(8.43)
35
(21.39)
8.13
(13.26)

(2.07)
(1.21)
36
(6.55)
2.49
(4.06)

(14.66)
(8.38)
37
(18.11)
6.88
(11.23)

(1.65)
(0.92)
38
(8.61)
3.27
(5.34)

(14.91)
(8.18)
39
(13.47)
5.12
(8.35)

(1.21)
(0.65)
40
(8.86)
3.37
(5.50)

(12.41)
(6.53)
41
(6.65)
2.53
(4.13)

(3.76)
(1.94)
42
(2.04)
0.77
(1.26)

(3.90)
(1.97)
43
(0.00)
0.00
(0.00)

(7.62)
(3.77)
44

(13.26)
(6.43)
45

(4.06)
(1.93)
46

(11.23)
(5.22)
47

(5.34)
(2.43)
48

(8.35)
(3.72)
49

(5.50)
(2.40)
50

(4.13)
(1.76)

(1.26)
(0.53)

(0.00)
(0.00)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(173.90)

50

Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy

Cash Flow Analysis of Borrow-and-Buy Alternative (In Million Dollars)

6.75%
38.00%
4.19%
25
0
1
2
3
4
5
6
7
8
267.90
(267.90)
(3.26)
(3.37)
(3.49)
(3.60)
(3.72)
(3.85)
(3.98)
(4.11)
(9.04)
(8.93)
(8.82)
(8.70)
(8.58)
(8.45)
(8.32)
(8.19)
3.44
3.39
3.35
3.31
3.26
3.21
3.16
3.11
7.27
7.27
12.47
12.47
8.90
8.90
6.36
6.36

10

(4.25)
(8.05)
3.06
4.55

(4.40)
(7.91)
3.00
4.55

(1.59)
(1.56)
11
(4.55)
(7.76)
2.95
4.55

(1.64)
(1.57)
12
(4.70)
(7.60)
2.89
4.55

3.51
3.30
13
(4.86)
(7.45)
2.83
2.27

3.47
3.19
14
(5.02)
(7.28)
2.77
2.27

(0.14)
(0.13)
15
(5.19)
(7.11)
2.70

(0.19)
(0.17)
16
(5.37)
(6.94)
2.64

(2.78)
(2.41)
17
(5.55)
(6.76)
2.57

(2.83)
(2.40)
18
(5.73)
(6.57)
2.50

(4.70)
(3.90)
19
(5.93)
(6.38)
2.42

(4.75)
(3.86)
20
(6.13)
(6.18)
2.35

(4.81)
(3.83)
21
(6.33)
(5.97)
2.27

(4.87)
(3.80)
22
(6.55)
(5.75)
2.19

(7.21)
(5.51)
23
(6.77)
(5.53)
2.10

(7.27)
(5.44)
24
(7.00)
(5.31)
2.02

(9.60)
(7.04)
25
(7.23)
(5.07)
1.93

(9.67)
(6.94)
26
(7.48)
(4.83)
1.83

(9.74)
(6.85)
27
(7.73)
(4.57)
1.74

(9.81)
(6.76)
28
(7.99)
(4.31)
1.64

(9.88)
(6.67)
29
(8.26)
(4.04)
1.54

(9.96)
(6.58)
30
(8.54)
(3.76)
1.43

(10.03)
(6.50)
31
(8.83)
(3.48)
1.32

(10.12) (10.20) (10.29) (10.38) (10.47) (10.57) (10.66)

(6.41)
(6.33)
(6.26)
(6.18)
(6.11)
(6.04)
(5.97)
32
33
34
35
36
37
38
(9.13)
(9.43)
(9.75) (10.08) (10.42) (10.77) (11.14)
(3.18)
(2.87)
(2.55)
(2.22)
(1.88)
(1.53)
(1.17)
1.21
1.09
0.97
0.84
0.71
0.58
0.44

(10.98)
(5.78)
41

(11.10)
(5.72)
42

(11.21)
(5.66)
43

(11.33)
(5.61)
44

(11.46)
(5.55)
45

(11.59)
(5.50)
46

(11.72)
(5.45)
47

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(10.77) (10.87)
(5.91)
(5.84)
39
40
(11.51) (11.90)
(0.79) (0.40)
0.30
0.15

(11.86) (12.00)
(5.40)
(5.35)
48
49

0.00
0.00

0.00
0.00

(12.15)
(5.31)
50

40.19
40.19
14.27

Sums

(9.50)

(59.40)

(61.56)

(55.32)

14.27

(171.51)

51

ValueofEarlyBuyoutOption
Amtrakwouldacquireequipmentfrom
BNYCFin2017for$126.6million

Avgyieldon30
yearbond:5.5%

Assumedmarket
equityweight:
100%

Assumedbeta:1

Marketrisk
premium:6%

Type:simpleEuropeancalloption

Valuationmodel:BSM

Optionvalueishighlysensitiveto
WACC

Costofequity:
11.5%[referred
incaseis11.8%]

52

Underlying as et value $17 Mil ion (Present value of strike price of 126.6 mil ion 18 years from now discounted at WACC 11.8%)
Strike price $126.6 Mil ion Purchase price os asset
Maturity 18.5 years (June 1999 to Dec 2017)
Risk-fre rate
6% 5%to 6%
Volatil ty
25% Footnote 10; volatility estimate of locomotive and train cars
Option Vlaue (BSM)$2.97 Mil ion
53

AdjustedNPV
No Tax

Tax Rate of
38%

Lease

-$217.29
million

-$170.93
million

Borrowand-buy

-$260.26
million

-$171.51
million
54

BenefitsofDebt
BeneficialbasedonEPS,
DPS,ROE,Earnings
availabletosecurity
holders

Reducedtaxes

Financialadvertising
signalingmore
aggressivefinancial
policies

Capitalstructurechange
iseasilyreversible[can
paydown(ifrequired)
thedebtquicklywith
internalfunds]

BenefitsofDebt
Noneedfor
accesstodebt
markets

Noconcernabout
creditrationingat
highdebtratios

Possessesplenty
ofcollateral

DisadvantagesofDebt
IncreaseinD/Aratioraisesthe
costofbothdebtandequity

Moredebt=increasesriskof
financialdistress+higherinterest
rates

Betaincreasesandfinancial
leverageincreases

Equilibriumrecapitalizationprice
isthepricethatisexpectedto
prevailaftertherepurchase,and
itisthepricethatcompany
shouldpayforthesharesifitisto
befairtoallshareholders

DebtFinancingDisciplinesManagers
Controloninvestinginriskprojects
Higherdebtrequirementsforcesmanagertoearnmoreto
servicedebt
HighdebtpaymentsinLBOforcemanagerstoconservecash
byeliminatingunnecessaryexpenditures
Morecarefulwithshareholdersmoney

MarketEffectofNewDebt
Signaling
effect

Stockholdersopiniononexpectationof
insiders

Incentive
effects

Bindmanagementtodeliverpredictable
operatingresultsinordertoservicethe
debt

Clientele
effects

Investorsmaybailoutofstock;allowing
otherstobuyin

Leasingvs.Buying

60

IncrementalCashFlows

61

LeveragedLease

62

DecisionTreeforanExploration
Projects

63