1. ABC Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 8%. The firm's tax rate is 40%. The CCA rate is 20% (Class 8). What is the present value of the depreciation tax shield?
a. 293,130
b. $243,885
c. $277,177
d. $236,959
e. $286,000
2. A growth stock offers NO potential for capital gains.
The market value of a firm that invests in projects providing a return less than its WACC should increase over time.
True
False
3. A firm has a tax rate of 35%, an unlevered rate of return of 12%, total debt of $2,000, and an EBIT of $150.00. What is the unlevered value of the firm?
a. $696
b. $1,161
c. $1,532
d. $813
e. $1,346
4. A firm is worth $1.500, has a 35% tax rate, total debt of $600, an unlevered return of 15%, and a cost of debt of 6.5%. What is the cost of equity?
a. 18.68%
b. 18.41%
c. 20.20%
d. 19.14%
e. 16.67%
5. Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 9%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?
a. $7,771
b. $21,802
c. $15,363
d. $5,399
e. $6,594