Alpha Corporation owns only fully depreciated equipment. Beta Corporation owns only new equipment, which will be depreciated over ten years. If Alpha and Beta have the same sales, costs, tax rate, and enterprise value, then: Multiple Choice Beta will have the lower EV multiple. Alpha will have the lower return on equity. Beta will have the higher net income. Alpha and Beta will have the same EV multiple.

Alpha Corporation owns only fully depreciated equipment. Beta Corporation owns only new equipment, which will be depreciated over ten years. If Alpha and Beta have the same sales, costs, tax rate, and enterprise value, then: Multiple Choice Beta will have the lower EV multiple. Alpha will have the lower return on equity. Beta will have the higher net income. Alpha and Beta will have the same EV multiple.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...

See similar textbooks

Similar questions

4) If the firm follows a residual dividend policy, determine its payout ratio. Task 2: ELTER Industries is considering the expansion project that involves the purchase of new equipment. The cost of equipment is €460,000, including installation and transportation costs. The equipment will be depreciated to zero over a 4-year period using straight-line depreciation approach. The project will generate additional annual revenues of €250,000, and it will result in additional annual cash operating expenses of €93,000. The company expects to sell the equipment after 4 years for €80,000. Additionally, during the life of the investment, an inventory investment of €90,000 is needed. The inventory investment will be made at the time of the purchase of the equipment. ELTER Industries has the 40% corporate tax rate. The required rate of return for the project = 10%. 1) Determine the project's initial cash outlay;
Allen Corporation can (1) build a new plant that should generate a before-tax return of 10%, or (2) invest the same funds in the preferred stock of Florida Power & Light (FPL), which should provide Allen with a before-tax return of 9%, all in the form of dividends. Assume that Allen’s marginal tax rate is 25%, and that 50% of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen’s effective return on the money invested? A) a 60% in the project, 40% in FPL B) 60% in FPL; 40% in the project c) 50% in each D) all in the plant project e) all in FPL preferred stock
The Golden Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 3 years ago, had an expected life of 6 years and an expected salvage value of zero. Assume Evans uses simplified straight-line depreciation and could sell this machine for $8,000. Also assume Evans has a 34 percent marginal tax rate. What would be the taxes associated with this sale?
Godo
Sheridan Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 51% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 31,700 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.05 per unit. If Sheridan Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,900 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. (a) Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Direct materials Direct labor Variable overhead costs A Fixed manufacturing costs Purchase price Total…
Blazer Inc. is thinking of acquiring Laker Company. Blazer expects Laker's NOPAT to be $9 million the first year, with no net investment in operating capital and no interest expense. For the second year, Laker is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Laker will need $10 million of net new investment in operating capital. Laker's marginal tax rate is 40%. After the second year, the free cash flows and tax shields will grow at a constant rate of 4%. Blazer has determined that Laker's cost of equity is 17.5%, and Laker currently has no debt outstanding. Assume all cash flows occur at the end of the year. Blazer must pay $45 million to acquire Laker. What is the NPV of the proposed acquisition?
Use this information for the next two problems. Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 40% tax bracket. If Clark does not make the acquisition, what will be the company’s tax liability and earnings after taxes in Year 3? If the acquisition is made, what will be the company’s tax liability and earnings after taxes in year 3?
Use this information for the next two problems. Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 40% tax bracket. 11. If Clark does not make the acquisition, what will be the company’s tax liability and earnings after taxes in Year 3?
Novak Company would like to start a new venture. The company is currently in the 24% marginal tax bracket and uses a 4% discount factor. The company projects that the venture will produce before-tax cash flows of $9,000 in Year 0, $20,000 in Year 1, and $33,000 in Year 2. (a) If taxable income and the before-tax cash flows are equal in the year received, compute the present value of the cash flows. (Round present value factor calculations to 3 decimal places, e.g. 1.251 and final answer to O decimal places, e.g. 58,971.) Present value
A3) Finance You purchase an asset for $1,000,000. Three years later you sell the asset for $300,000. The UCC for the class was $500,000 and this is the last asset in the class. Find the value of the tax consequences if the cost of capital is 11%, the cca rate is 15% and the corporate tax rate is 30%. Show the tax consequences as negative if the net amount is a tax refund.
b. Cendrawasih Inc. is considering replacing the equipment it uses to produce crayons. The equipment would cost RM1.37 million, have a 12-year life, and lower manufacturing costs by an estimated RM304,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. Determine the net income from this proposed project.
2 While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear?there is no mortgage on it. Which of the following statements is CORRECT? Answer If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.…