Indicates the amount of wealth created for shareholders

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Reference no: EM132020379

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 5%. 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. 301,242

b. $336,959

c. $343,885

d. $318,767

e. $351,193

2. Watson's Automotive has a $375,000 bond issue outstanding that is selling at 75 percent of face value. Watson's also has 21,000 shares of common stock outstanding with a market price of $21 a share. What is the weight of the debt as it relates to the firm's weighted average cost of capital?

a. 46 percent

b. 39 percent

c. 40 percent

d. 41 percent

e. 42 percent

3. Your company purchased a piece of land five years ago for $125,000 and subsequently added $275,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $385,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

a. The property should be valued at zero since it is a sunk cost.

b. $225,000

c. $150,000.

d. $385,000.

e. $125,000.

4. Which of the following decision rules indicates the amount of wealth created for shareholders?

a. Average accounting return

b. Discounted payback

c. Payback period

d. Internal rate of return

e. Net present value

5. You purchase a machine for $200,000 which belongs in a 30% CCA class. What is the present value of the CCA tax shield on the machine if it is sold at the end of the fifth year for $50,000, your tax rate is 34%, and the appropriate discount rate is 10%?

a. $86,994

b. $66,623

c. $41,964

d. $52,215

e. $40,765

6. Employee turnover is an example of direct bankruptcy costs.

True

False

Reference no: EM132020379

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