Question

# 1. A firm has a general-purpose machine, which has a book value of \$400,000 and can...

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?

\$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):

66.67

60.14

87.50

100.00

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