Which one of the following actions by a financial manager is most apt to create an agency problem? Increasing current profits wh
1 answer:
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Answer:
1) none of the above $3828.57 ( E )
2) $1143 ( c )
3) $24571 ( A )
4) $17142.86 ( E )
5) 12% ( B )
6) $410 ( B )
7) $2744.95 ( f )
8) $17,489 ( c )
9) $24282.36 ( F )
10) 867
Explanation:
1) The annual after-tax net returns
net income = cash flow - depreciation
= $10500 - = 10500 - (40000/7) = $4785.71
calculate the annual net after tax returns = net income * (1 - Tax rate ) = 4785 * (0.80) = $3828.57
2) Tax savings from depreciation
Tax savings from depreciation = Depreciation amount * Tax rate
=
= (40000/7) * 0.2 = $1142.86 ≈ $1143
3) After tax terminal value in three years
Sale value = $25000,
Book value = 40000 - ( 5714.29 * 3 ) = $22857.13
Gain on sale = sale value - book value = $2142.87
tax rate = gain on sale * tax rate = 2142.87 * 0.2 = $428.57
Terminal value = sales value - tax rate = 25000 - 428.57 ≈ $24571
4) Accumulated depreciation over the three years
= depreciation amount * 3 years
=5714.29 * 3 = $17142.86
5) After tax discount rate
= discount rate * (1 - tax rate )
= 15% * 0.80 = 12%
6) Present value of the after-tax net returns
SOLUTION attached below
7) Present value tax savings from depreciation
= Tax savings from depreciation / ( 1+r)^n note ; n = 3
= $1142.86 / ( 1 + 0.12 )^3 = $2744.95
8) present value of the after-tax terminal value
Pv of terminal value = Terminal value / ( 1 + r ) ^n
= $24571.43 / ( 1 + 0.12 ) ^3 = $17,489
9) Net present value
= net cash flows / ( 1 + r ) ^n
= 34114.29 / ( 1 + 0.12) ^3
= $34114.29 / 1.4049 = $24282.36
AT
