Suppose that the corporate tax rate is 25%, there is an investment tax credit of 10%, the

Question:

Suppose that the corporate tax rate is 25%, there is an investment tax credit of 10%, the depreciation rate is 5%, and dividend yield is 10%. The official depreciation schedule is such that the present discounted value of depreciation allowances is 40% of the purchase price of the machine.

a. Calculate the per-period marginal cost of each dollar that the firm spends on the machine.

b. If the marginal benefit per period is MB = 40 – 0.6K, where K is the number of dollars spent on the machine, what is the optimal amount of machinery purchased?

c. How would your answer change if the investment tax credit increased to 20%?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...