Question

detailed explanation need for q2 and q3. for q3, I don't understand why can't we use the beta of 1.2 instead of use dell’s beta? thank you! for q 2 we use the year 4 rate 7.41% of the 3 year depreciation state is it because the asset was bought 3 years ago so this year is considering to be the 4th? so confused

2. A piece of asset was bought at $300 three years ago. The depreciation follows a three-year MACRS and asset is depreciatedt0( This year tax salvage value it is sold for $50. The tax rate is 40%The after- A. $50.00 B. $13.7 C. $30.00 D. $19.9 E. $38.9 3. Coca Cola is considering launching a new line of business -personal computer. Coca Cola's beta is12, and Dell's betafs l 9 Risk free rate is 35% market return is 11%. what is the appropriate discount rate for this new project? A. 11.75% B. 12.5% C. 13.75% D. 15.75% 0,035 0.035aCo.-0.035) 17,75% . E. 17.75%

Answer 1

for question 2 at end of 3 years book value of 7.41% is still remaining. When they say that it will be depreciated to 0, it means they will immediately deprecate the remaining book value at the 3 years to 0 and take the tax shield of 0.0741*300*0.4 = 8.9

for question 3 dells beta is used because business of dell matches the new business that coca cola is starting so instead of using coca cola business beta of soft drinks, dells beta for personal computer should be used