What is the present value at a 10% discount rate of the depreciation tax shield

Question

What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?

A. $10,866
B. $13,268
C. $17,500
D. $37,908

Which of the following costs probably should not be allocated to the investment needed for a new project?
A. Increase in accounts receivable
B. New warehouse, built for this project
C. 25% of the Vice President's salary
D. Labor expense for employees in new warehouse

What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?
A. $19.23
B. $25.00
C. $35.71
D. $37.86

Explanation / Answer

1) depriciation poer year = 50000/5 = 10000

tax sheild = 0.35*10000*(1-1.1^-5)/.1 = 13268

B. $13,268

2)C. 25% of the Vice President's salary

3) current price of a stock = 5/(0.2-0.06) = 35.71

C. $35.71

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