A Company Is Looking to Purchase and Replace a Fixed

question 137

Multiple Choice

A company is looking to purchase and replace a fixed asset for $245,000. It will sell the asset that will be replaced for $46,000 but will incur a $20,000 gain upon that sale. It must also commit $30,000 of working-capital to the investment. The firm's tax rate is 35%. What is the amount of the relevant initial investment?

• A) $245,000
• B) $254,000
• C) $199,000
• D) $206,000

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Definitions:

Contingently Issuable Common Stock

Shares that may be issued in the future based on the occurrence of certain events.

Diluted Earnings Per Share

A measure of a company's profit divided by the number of shares outstanding, including all possible sources of conversion.

Treasury Stock Method

A method used to compute the diluted shares outstanding by assuming all in-the-money options and warrants are exercised and the proceeds from exercise are used to buy back shares at the average market price.

Market Price

The current price at which an asset or service can be bought or sold in a open and competitive market.