1. Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $450,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?
a. The property should be valued at zero since it is a sunk cost.
b. The original $150,000 purchase price of the land itself.
c. The present book value of $225,000.
d. The after-tax sales value of $450,000.
e. The sales price of $450,000 less the book value of the improvements.
2. Which of the following is correct regarding agency costs?
a. Indirect costs occur when shareholders must incur costs to monitor the manager's actions.
b. Indirect costs occur when managers buy assets considered unnecessary by the firm's owners.
c. Company paid club memberships for executives are an example of direct agency costs.
d. Direct costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take
e. Direct costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take