Suppose You Sell a Fixed Asset for $90,000 When Its

question 108

Multiple Choice

Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale) ?

• A)$3,000
• B)$5,000
• C)$92,000
• D)$95,000

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Definitions:

Constant Growth DCF Model

A method of valuing a company using the theory that its stock is worth the sum of all its future cash flows, discounted back to their present value at a constant growth rate.

Perpetual Preferred Stock

A type of preferred stock with no fixed maturity date, where dividends must be paid by the company before dividends are paid to common stockholders.

Expected Return

The weighted average of all possible returns for an investment, with weights representing the probabilities of each outcome.

Required Return

The minimum gain investors expect from an investment, considering its risk level; synonymous with required rate of return.