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In: Finance

Question 6 You purchase a machine for $200,000 which belongs in a 30% CCA class. What...

Question 6

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 $24,000, your tax rate is 34%, and the appropriate discount rate is 10%?

Select one or more:

a. $66,623

b. $40,143

c. $86,994

d. $45,227

e. $46,202

Question 7

A financial lease is usually a shorter-term lease in which the lessor is responsible for insurance, taxes, and upkeep.

Select one:

True

False

Question 8

Given a tax rate of 15% for income up to $50,000, a tax rate of 25% for income between $50,001 and $75,000, and a tax rate of 34% for income between $75,001 and $100,000, and a tax rate of 39% for income above $100,001, if ABC Inc. reports taxable income of $175,000. How large is this firm's tax bill?

Select one:

a. $61,250

b. $48,750

c. $91,125

d. $51,500

e. $55,000

Question 9

Eight months ago, Turner purchased 100 shares of Delta Frames stock at a price of $46.25 a share. Delta pays a quarterly dividend of $2.10 a share. Today, Turner sold all of his shares for $49 per share. What is Turner's total capital gain on this investment?

Select one:

a. $355

b. $275

c. $155

d. $200

e. $180

Question 10

Watson's Automotive has a $375,000 bond issue outstanding that is selling at 85 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?

Select one:

a. 48 percent

b. 44 percent

c. 42 percent

d. 40 percent

e. 41 percent

Solutions

Expert Solution

(6) The CCA depreciation is a variable base depreciation which essentially implies that at the end of each year, the depreciation basis is the depreciated value at the end of that year. Unlike, MACRS depreciation, the depreciation basis is not fixed at the assets initial price. Further, as the CCA depreciation occurs on a reduced base every, it essentially implies that the depreciated value will never become zero and continue to perpetuity. If the asset is sold after some time, the depreciated value is reduced by the amount of the sale proceeds and the PV of CCA tax shield is adjusted in order to reflect the impact of lower expected CCA tax shields after the sale (tax shields will be lower as the deduction of the sale proceeds further depresses the depreciation base).

PV of CCA Tax Shield = [C x d x T / (k+d)] x [(1+k/2) / (1+k)] - [S x d x T / (k+d)] x [1/(1+k)^(n)] where k is the discount rate, d is the depreciation rate, C is the initial asset cost, T is the tax rate, S is the sales proceed and n is the end of the time period at which the asset is sold.

Therefore, PV of CCA Tax Shield = [200000 x 0.3 x 0.34 / 0.4] x [1.05/1.1] - [24000 x 0.3 x 0.34 / 0.4] x [1/(1.1)^(5)] = $ 44881.78 or $ 45227 approximately.

Hence, the correct option is (d).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.


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