The American Recovery and Reinvestment Act of 2009 #4

Directions: Use the following to respond to the 3 questions (A,B,C) presented below. The American Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act. The Act, like the earlier Economic Stimulus Act of 2008, included a number of tax changes designed to help businesses and stimulate investment:

Bonus Depreciation. The Act extended a temporary rule (first passed as part of the Economic Stimulus Act of 2008) allowing additional first-year depreciation of 50% of the cost of the asset. By further accelerating the depreciation allowance, this measure increases the present value of the depreciation tax shields associated with new capital expenditures, raising the NPV of such investment.

Increased Section 179 Expensing of Capital Expenditures.

Section 179 of the tax code allows small- and medium-sized businesses to immediately deduct the full purchase price of capital equipment rather than depreciate it over time. Congress doubled the limit for this deduction to a maximum of $250,000 in 2008, and this higher limit was extended by the Act through 2009. Again, being able to receive the tax deductions for such expenses immediately increases their

present value and makes investment more attractive. Extended Loss Carrybacks for Small Businesses. Under the Act, small businesses could carry back losses incurred in 2008 for up to five years, rather than two years. While this extension did not directly affect the NPV of new invest ments, it meant struggling businesses were more likely to receive refunds of taxes already paid, providing much needed cash in the midst of the financial crisis.

a. One of your business clients used their additional cash flow to avoid closing their doors. How can using the Interest Tax Shield help them gain more control over their debt financing?

b. Your business client is on the verge of filing bankruptcy. In fact, whatever gains her firm derived from The American Recovery and Reinvestment Act of 2009 were erased when a hurricane struck her main warehouse facility. How would you help her evaluate the financial distress costs and decide if she should file bankruptcy?   

c. A small start-up company just received millions of dollars in capital to move their video and voice technology to market. How would you utilize the WACC to value their project and help them optimize the use of their funds? What additional gains from the Act would help them with their valuation?