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You are still an employee of University Consultants, Ltd. The investor tells you she would also like to know how tax considerations affect your investment analysis. You determine that the building represents 90 percent of value and would be depreciated over 39 years (use 1/39 per year).
The potential investor indicates that she is in the 36 percent tax bracket and has enough passive income from other activities so that any passive losses from this activity would not be subject to any passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent.
a. What is the investor's expected after-tax internal rate of return on equity invested (ATIRR)? How does this compare with the before-tax IRR (BTIRR) calculated earlier?
b. What is the effective tax rate and before-tax equivalent yield?
c. How would you evaluate the tax benefits of this investment?
d. Recalculate the ATIRR in part (a) under the assumption that the investor cannot deduct any of the passive losses (they all become suspended) until the property is sold after five years.
As the financial manager for a firm, explain how this relationship would affect your investment decisions.- Explain how your decisions might affect short-term revenue forecasts.
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In addition to the tax shield offered by governments around the world, debt has a lower required rate of return than equity - explain why this is so? Given the inherent tax shield advantages why might we still come across 100% Equity financed firms?
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What is the present value of an annuity of $7,300 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 6 percent.
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