If the selling price of an asset at disposal is less than its book value, then the after-tax cash flow is the selling price minus the tax on the gain. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: If the selling price of an asset at disposal is GREATER […]
Date: September 19th, 2020
Eastern Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 40%. If the machine is sold at the […]
Date: September 19th, 2020
Southwest Co. purchases an asset for $60,000. This asset qualifies as a seven-year recovery asset under MACRS. Winston has a tax rate of 30%. The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end […]
Date: September 19th, 2020
The leading piece of theoretical research in corporate finance is Myers and Majluf (1984). They showed that when there is information asymmetry between the market and managers, a pecking order emerges in terms of how the firm should obtain funds for capital investments. Specifically, a firm would prefer to use: a. debt, then retained earnings, […]
Date: September 19th, 2020
Leland and Pyle (1977) examine the effect of informational asymmetries on equilibrium corporate valuation and financial structure. The authors develop a signaling model and work through a specific example, focusing on optimal debt levels under conditions of asymmetric information. In their signaling model, an entrepreneur seeks financing for a project whose true value is known […]
Date: September 19th, 2020
Briefly describe MACRS depreciation. What will be an ideal response? ANSWER Answer: MACRS is a government-mandated accelerated depreciation system that depreciates the capital asset at the maximum accelerated amount allowed each year. MACRS stands for modified accelerated cost recovery system and classifies the “life” of every asset for use in determining the depreciation […]
Date: September 19th, 2020
Briefly describe straight-line depreciation. What will be an ideal response? ANSWER Answer: With straight-line depreciation, capital assets are depreciated by the same amount each year. The annual depreciation is determined by the initial cost plus installation cost less anticipated salvage value, and this entire amount divided by the number of years of useful […]
Date: September 19th, 2020
MACRS stands for modified accelerated cost recovery system and classifies the “life” of every asset for use in determining the depreciation expense each year. Indicate whether the statement is true or false. ANSWER Answer: TRUE
Date: September 19th, 2020
When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the book value of the asset at the time of disposal. If a ________ has occurred, ________ are incurred. A) gain, tax reductions B) gain, taxes C) gain, tax credits D) loss, taxes ANSWER Answer: […]
Date: September 19th, 2020
The pecking order explanation of capital structure states that a hierarchy of financing exists for firms, in which new external debt financing is employed first, followed by retained earnings and finally by external equity financing. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
