A growth stock offers no potential for capital gains

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Reference no: EM132020364

1. ABC Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 8%. The firm's tax rate is 40%. The CCA rate is 20% (Class 8). What is the present value of the depreciation tax shield?

a. 293,130

b. $243,885

c. $277,177

d. $236,959

e. $286,000

2. A growth stock offers NO potential for capital gains.

The market value of a firm that invests in projects providing a return less than its WACC should increase over time.

True

False

3. A firm has a tax rate of 35%, an unlevered rate of return of 12%, total debt of $2,000, and an EBIT of $150.00. What is the unlevered value of the firm?

a. $696

b. $1,161

c. $1,532

d. $813

e. $1,346

4. A firm is worth $1.500, has a 35% tax rate, total debt of $600, an unlevered return of 15%, and a cost of debt of 6.5%. What is the cost of equity?

a. 18.68%

b. 18.41%

c. 20.20%

d. 19.14%

e. 16.67%

5. Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 9%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?

a. $7,771

b. $21,802

c. $15,363

d. $5,399

e. $6,594

Reference no: EM132020364

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