The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost $ 30,000 Years of useful life (economic life) 1 Tax rate 20% Required rate of return on equity 10% Required return on debt 5% Debt ratio 50% Annual revenues $ 145,000 Operating expenses (excluding depreciation) $ 100,000 Report how many dollars are distributed at year end to:
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.
The firm is contemplating the following:
Vehicle acquisition cost $ 30,000
Years of useful life (economic life) 1
Tax rate 20%
Required
Required return on debt 5%
Debt ratio 50%
Annual revenues $ 145,000
Operating expenses (excluding
Report how many dollars are distributed at year end to:
- To debt holder: principal and interest
- To tax authority
- To shareholder
If the Asset having life of only one year then whole cost is eligible for depreciation. If the new business required 30000 for starting the business activity and debt ratio is 50% then 15000 required from debt and 15000 from shareholder via equity.
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