7. Michaelangelo, Inc., an art firm has debt of $40,000 (market value). The cost

Question

7. Michaelangelo, Inc., an art firm has debt of $40,000 (market value). The cost of debt for the firm before-tax is 18.33%. The tax rate for the firm is 40%. If the firm also has equity of $60,000 (market value) whose cost is 17%, what would be the firm's cost of capital assuming that the firm uses only these two sources of financing? (Points : 3)       12.93%
      14.6%
      16.39%
      17%

8. Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased. (Points : 3)       $252,000
      $228,000
      $260,000
      $248,000


7. Michaelangelo, Inc., an art firm has debt of $40,000 (market value). The cost of debt for the firm before-tax is 18.33%. The tax rate for the firm is 40%. If the firm also has equity of $60,000 (market value) whose cost is 17%, what would be the firm's cost of capital assuming that the firm uses only these two sources of financing? (Points : 3)       12.93%
      14.6%
      16.39%
      17%

Explanation / Answer

Hi,

Please find the answers as follows:

7)

Cost of Capital = 18.33*(1-.40)*40000/(40000 + 60000) + 17*60000/(40000 + 60000) = 14.60%

8)

NINV = 270000 (Purchase Cost) - 10000 ( Sales Value of Old Hexene Extractor) = 260000

Thanks.

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