Sample Questions: CFGB6102

1. An asset was purchased three years ago for $100,000 and can be sold for $40,000
today. The asset has been depreciated using the MACR !"year reco#ery period and
the $r% pays 40 percent ta&es on both ordinary inco%e and capital gain.
(a) Compute recaptured depreciation and capital gain (loss), if any.
(b) Find the firms tax liability.
(a) Book Value = 100,000 (1 0.20 0.32 0.19) = $29,000
Recaptured depreciation = 40,000 29,000 = $11,000
Capital gain = 0
$11,000
(b) Tax liability = 11,000 0.40 = $4,400
'. A %achine was purchased two years ago for $1'0,000 and can be sold for $!0,000
today. The %achine has been depreciated using the MACR !"year reco#ery period
and the $r% pays
40 percent ta&es on both ordinary inco%e and capital gains.
(a) Compute recaptured depreciation and capital gain (loss), if any.
(b) Find the firms tax liability.
(a) Book Value = 120,000 (1 0.20 0.32) = $57,600
Recaptured depreciation = $0
Capital loss = 57,600 50,000 = 7,600
(b) Tax benefit = 7,600 0.40 = $3,040
(. Co%pute the depreciation #alues for an asset which costs $!!,000 and re)uires
$!,000 in installation costs using MACR !"year reco#ery period.
Depreciable Value = 55,000 + 5,000 = $60,000
Year Depreciable Value Percentages Depreciation Values
1 $60,000 20% $12,000
2 60,000 32 19,200
3 60,000 19 11,400
4 60,000 12 7,200
5 60,000 12 7,200
6 60,000 5 3,000
$60,000
4. A $r% has deter%ined its opti%al capital structure, which is co%posed of the
following sources and target %ar*et #alue proportions+
Source of Capital
Target Market
Proportions
Long-term debt 30%
Preferred stock 5
Common stock equity 65
Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of
the face value would be required in addition to the discount of $20.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock
will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firms common stock is currently selling for $40 per share. The dividend expected to
be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for
the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock
issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally,
the firms marginal tax rate is 40 percent.
Calculate the firms weighted average cost of capital assuming the firm has exhausted all retained earnings.
ki = 5.6%
kp = 12.9%
kn = 21.34%
ka = (0.3)(5.6) + (0.05)(12.9) + (0.65)(21.34) = 16.20%

!. ,ro%o ,a* has co%piled the following $nancial data+
Source of Capital Book Value Market Value Cost
Long-term debt $10,000,000 $8,500,000 5.0%
Preferred stock 1,000,000 1,500,000 14.0
Common stock equity 9,000,000 15,000,000 20.0
$20,000,000 $25,000,000
(a) Calculate the weighted average cost of capital using book value weights.
(b) Calculate the weighted average cost of capital using market value weights.
(a)
Long-term debt 50%
Preferred stock 5
Common stock equity 45
100%
ka = (0.5)(5) + (0.05)(14) + (0.45)(20) = 2.5 + 0.7 + 9 = 12.2%
(b)
Long-term debt 34%
Preferred stock 6
Common stock equity 60
100%
ka = (0.34)(5) + (0.06)(14) + (0.60)(20) = 1.7 + 0.84 + 12 = 14.5%