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    Cash dividends are demonstrated

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    1. Salvage Value.

    Your firm purchased machinery with a 7-year MACRS life for $10 million. The project, however, will end after 5 years. If the equipment can be sold for $4.5 million at the completion of the project, and your firm's tax rate is 35 percent, what is the after-tax cash flow from the sale of the machinery?

    2. Cash Dividends. The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $0.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance sheet for Payout is shown on the following table.

    Assets Liabilities and Equity
    Cash $100,000 Equity $1,000,000
    Fixed assets 900,000

    a. What price is Payout stock selling for today?

    b. What price will it sell for tomorrow? Ignore taxes.

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    Solution Preview

    Cash Dividends
    1. Salvage Value. Your firm purchased machinery with a 7-year MACRS life for $10 million. The project, however, will end after 5 years. If the equipment can be sold for $4.5 million at the completion of the project, and your firm's tax rate is 35 percent, what is the after-tax cash flow from the sale of the machinery?

    MACRS Table ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what price is Payout stock selling for today and what price will it sell for tomorrow.

    $2.19

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