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The American Recovery and Reinvestment Act of 2009

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Need a clearer and more defined explanation of American Recovery and Reinvestment Act of 2009 specifically:

- How would Bonus Depreciation affect a company's stock price
- If a CEO wanted to take his/her company public, how would the ARRA assist the company to minimize risk and return
- How would the Capital Asset Pricing Model help a business owner reinvest cash into the stock market to cover employee health insurance.

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- How would Bonus Depreciation affect a company's stock price

Under the American Recovery and Reinvestment Act of 2009 (ARRA), bonus depreciation and Section 179 expense were both extended. Bonus depreciation is an additional amount of depreciation that is allowed for certain property and in certain tax years, which essentially accelerates the company's depreciation expense for that year. Section 179 works in the same general manner. A company can Section 179 certain property in certain years when it is allowable. In most cases, the company is allowed to expense 100% of the purchase price of the asset, assuming that it is used 100% for business use, and as long as expensing 100% of the asset does not create a loss for the company. In other words, if net income is $50,000 and the asset is $60,000, the company can't use $60,000 in Section 179 expense and take a $10,000 loss.

The point of the bonus depreciation from ARRA was to encourage businesses to invest. By doing so, they're helping to expand the economy through such investment. The company is then able to expense up to 100% of the asset's cost in the first year or a higher percentage of the asset in the first year, instead of waiting for subsequent years under normal depreciation. By doing so, it drops the company's net income because depreciation is treated as an ordinary expense.

While this is an attractive option for companies and definitely encourages investment, the downside is that it does create an additional "expense." Any type of depreciation, including bonus depreciation, is a non-cash expense. Even though it is treated as an ordinary expense on the income statement, it doesn't actually involve cash. Because it's an expense, it drops the company's net income. Savvy investors will typically analyze the financial statements and note the exact amount of ...

Solution Summary

This solution thoroughly discusses the American Recovery and Reinvestment Act of 2009, depreciation, risk and return, and CAPM. Includes 3 references.

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American Recovery and Reinvestment Act 2009

Using the American Recovery and Reeinvestment Act of 2009, need more clarity on:

How the Tax Shield could help a business who is about to close their doors gain control over their debt financing and how to evaluate the financial stress of a business who was struck by a natural disaster after they received ARRA gains. Is bankruptcy the only option?

How can a business who is just going to market use WACC to optimize their use of funds?

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