Question

Computing the terminal-year FCF: Babaloo Nightclubs purchased a disco mirror that currently has a book value of $10,000. If Babaloo sells the disco mirror for $500 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 39 percent marginal tax rate?

A) $500
B) $3,705
C) $4,205
D) $9,500

Answer 1

The net cash after taxes that Babaloo Nightclubs would receive from selling the disco mirror for $500, with a marginal tax rate of 39%, would be $305.

Step-by-step explanation:

To compute the net cash after taxes from the sale of an asset like Babaloo Nightclubs' disco mirror, we start with the sale price of the asset and deduct any tax consequences from the sale. Since the book value is $10,000 and the sale price is $500, Babaloo has incurred a loss of $9,500. This loss can be deducted from taxable income. However, to answer the question, we'll assume the tax implications are only on the sale proceeds itself.

Therefore, if Babaloo sells the mirror for $500 and is subject to a 39 percent marginal tax rate, the amount of tax paid on the sale would be calculated as the sale price multiplied by the tax rate, which is $500 * 0.39 = $195. To determine the net cash after taxes, subtract the tax from the sale price: $500 - $195 = $305.