Question

Martin and Miller is considering a project that requires $360,000 of fixed assets that are classified as 7-year property for MARCS. What is the book value of these assets at the end year 3?

Year	1	2	3	4	5	6	7	8
Percent	14.29	24.49	17.49	12.49	8.93	8.93	8.93	4.45

A. $112,464

B. $157,428

C. $162,309

D. $189,228

E. $220,392

_____________

If the securities market are only weak form efficient, then the price of a stock will:

A. react to new information over a couple of weeks

B. react slowly to new information concerning the future outlook of the firm

C. tend to overreact to new information concerning the future plans of the firm

D. be based solely on historical information

E. totally reflect the true value of the firm

Answer 1

I) Book value of assets at the end of year 3 = Cost of assets - Depriciation for 3 years

Here,

Cost of assets = $3,60,000

Depriciation = Cost of assets * MACRS depriciation rate

Year 1 depriciation = $3,60,000 * 14.29% = $51,444

Year 2 depriciation = $3,60,000 * 24.49% = $88,164

Year 3 depriciation = $3,60,000 * 17.49% = $62,964

Total depriciation upto year 3 = $51,444 + $88,164 + $62,964

Total depriciation upto year 3 = $2,02,572

Now,

Book value of assets at end of year 3 = $3,60,000 - $2,05,572

Book value of assets at end of year 3 = $1,57,428

Answer : B) $1,57,428

II) D) be based solely on historical information.

If securities market are only weak form efficient, then the price of stock will be based solely on historical information.