The accelerated write-off of capital costs in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to ________ concepts, we can surmise that bigger tax cuts in the earlier years and lower tax cuts in the later years are better than a steady tax cut […]
MACRS allocates the same amount of cost each period as determined by the total initial cost divided by the number of years of useful life of the machines. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: STRAIGHT LINE DEPRECIATION allocates the same amount of cost each period as determined […]
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 […]
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 […]
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 […]
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
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: […]
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
Miller and Rock (1985) developed an ingenious signaling model in which __ by a firm serve as powerful signals of the firm’s earnings capacity, and thus its value. Any such _ reveal that the firm has been generating, and is expected to continue to generate, high net cash inflows. a. cash payouts b. debt issuance […]
A firm is considering purchasing two assets. Asset A will have a useful life of 12 years and cost $4 million; it will have installation costs of $300,000 and a salvage or residual value of $400,000. Asset B will have a useful life of 8 years and cost $3.5 million; it will have installation costs […]
