UGBA09 - Summer 2008 Ismail Ceylan UGBA 103 Discussion...

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Summer 2008 Ismail Ceylan UGBA 103 Discussion Section June 26, 2008 Page 1 of 5 Discussion Section #9 Problem 1: a- A firm owns a building with a book value of $150,000 and a market value of $250,000. If the building is utilized for a project, then what is the opportunity cost ignoring taxes? b- A firm has a general-purpose machine, which has a book value of $400,000 and is sold for $600,000 in the market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project? c- A cash flow to be received at t=2 is expected to be $10,816. If the real rate of interest is 4% and the inflation rate is 4%, what is the expected real cash flow at t=2? d- The NPV obtained by discounting nominal cash flows using the nominal discount rate is: (I) The same as the NPV obtained by discounting real cash flows using the real discount rate (II) The same as the NPV obtained by discounting real cash flows using the nominal discount rate (III) The same as the NPV obtained by discounting nominal cash flows using the real discount rate A) I only B) II only C) III only D) II and III only e- Real cash flow occurring in year 2 is 60,000. If the inflation rate is 5% per year, calculate nominal cash flow for year 2. f- Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two years? g- If the depreciation amount is 500,000 and the marginal tax rate is 30%, then what is the tax shield due to depreciation? h- Modigliani and Miller’s Proposition I states that: A) The market value of any firm is independent of its capital structure B) The market value of a firm’s debt is independent of its capital structure C) The market value of a firm’s common stock is independent of its capital structure D) All of the above.
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Summer 2008 Ismail Ceylan UGBA 103 Discussion Section June 26, 2008 Page 2 of 5 i- You have been asked to evaluate a project with infinite life. Sales and costs are projected to
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