Question

please help

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $347000 and expenses by $240,000. The project will require $149,000 in fred assets that will be depreciated using the straight-line method to a zero book value over the year life of the project. The company has a marginal tax rate of 40 percent. What is the depreciation tax shield? Multiple Choice ο ο ο ο ο

Answer 1

Cost of asset = $149,000

Useful life = 8 years

Annual depreciation = Cost of asset/Useful life

= 149,000/8

= $18,625

Marginal tax rate = 40%

Depreciation tax shield = Annual depreciation x Tax rate

= 18,625 x 0.4

= $7,450

Third option is the correct option.

PE = 15.1 times

Net earnings = Addition to retained earnings + Dividend paid

= 1,575,000 + 525,000

= $2,100,000

Earning per share = Net income/Number of shares outstanding

= 2,100,000/495,000

= $4.24

Stock price = PE x Earning per share

= 15.1 x 4.24

= $64.06

Fifth option is the correct option

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