Question

1. A firm has a general-purpose machine, which has a book value of $400,000 and can be sold for $600,000 in the market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project considering the tax issues?

Group of answer choices

$600,000

$540,000

$400,000

None of the above

2.

A common stock will pay a dividend of $7 next year. After that, the dividends are expected to increase indefinitely at 6% per year. If the discount rate is 14% what is the present value of the stream of dividend payments? Hint-just focus on what is going on with the cash flow here (dividend). Show your work. The answer is closest to (rounded to two decimal places):

Group of answer choices

66.67

60.14

87.50

100.00

Answer 1

Question 1:

Sale Value = $600,000

Book Value = $400,000

Tax rate = 30%

Tax on sale = (Sale Value - Book Value) * Tax rate

= ($600,000 - $400,000) * 30%

= $60,000

After tax sale value = Sale Value - Tax on sale

= $600,000 - $60,000

= $540,000

Opportunity cost of using the machine in project considering the tax issues is $540,000

Question 2:

D1 = Expected Dividend = $7

g = Growth rate = 6%

r = Discount rate = 14%

Present Value of stream of Dividend payments = D1 / (r - g)

= $7 / (14% - 6%)

= $7 / 0.08

= $87.5

Therefore, Present Value of stream of dividend payments is $87.50