How will the irs decision affect the after-tax cost


Question 1: Co. A is about to pay a dividend of $3.15 per share.  Its future EPS and dividends are expected to grow with inflation, which is forecasted at 3% per year.  What is the company’s stock price?  The nominal cost of capital is 10%. (Problem 17 page110)

Question 2: Calculate the IRR for the following project

C0 = -4,000
C1 = 5,000
C2= 6,000
C3= -3,000

Question 3: You are the treasurer  of Co. A. The company has just ordered a piece of machinery for $800,000.   Of this sum, $100,000 is described by the supplier an an installation cost.  You do not know whether the IRS will permit the company to treat this cost as a tax-deductible current expense or as a capital investment.  In the latter case, the company will depreciate the installation expense using the MACRS tax depreciation schedule. How will the IRS decision affect the after-tax  cost of the machinery?  The tax rate is 40% and the opportunity cost of capital is 10%.

Question 4: Co A has a standard deviation of 42% per year and a beta of +.10.  Co. B has a standard deviation of 31% a year and a beat of +.66.  Which investment is safer for a diversified investor?

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Finance Basics: How will the irs decision affect the after-tax cost
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