Problems pg 79:
In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends was paid to shareholders during the year? Dividend = $780 million + $50 million - $810 million= $830 million - $810 million= $20 million 2-7
The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s in- come tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?
Taxable operating income $ 365,000
Taxable interest ($ 50,000)
Taxable dividend received$ 4,500
15000*(1 - 0.70) Total taxable income$ 319,500
a. The marginal rate for this company is 39%
The non-taxable dividends are: $15,000 * 0.7 = $ 10,500
Tax Liability =$ 22,250 + (319,500 ± 100,000)*0.39 = $ 107,855After
Taxable income $ 319,500
Taxable ($ 107855)
b) Non-taxable dividend received 15000*(0.70) $ 10,500
Net income $ 222,145
Average tax rate = Taxable interest income / Taxable operating income= 107855 / 319500 = 0.337574 *100%= 33.7574 = 33.76 %Average tax rate is 33.8 %
The Shrieves Corporation has $10,000 that it plans to invest in marketable secu- rities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.
A) AT&T bond = 7.5% * 10,000 = 0.075 * 10000 = $ 750
Taxes = 750 * 0.35 = $ 262.50
$ 750 - 262.50 = $487.50
487.50 / 10,000 = 0.04875 *100% = 4.875 %
Yield AT&T bond = 4.875 %
B) AT&T preferred stock = 6% * 10,000 = 0.06 * 10000 = $600 Tax exemption 70% = 600 * 0.7 = $ 420
Taxable = $600 - $420 = $ 180
Taxes = $ 180 * 0.35 = $ 63 in taxes$ 600 - $ 63 = $ 537
537 / 10000 = 0.0537 * 100% = 5.37%
Yield AT&T preferred stock = 5.37 %
c) State of Florida muni bonds = 5%
Muni bonds =10000 * 0.05 = $500
$500 / 10000 = 0.05 * 100 % = 5 %
Yield State of Florida muni bonds = 5%
Mini Case pg 45
Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to ex- plain the U.S. financial system to DellaTorre. A. Corporate finance is important to al managers it helps them with the skills that’s needed to identify, select and forecast the financial requirements for their company and come up with different ways of accumulating the capital needed. B. The three main forms of business organization are (1) sole proprietorships, (2) partnerships, and (3) corporations.
Proprietorship can be easily formed inexpensively, not too many government regulations along with no corporate taxes. Some advantages will be all expenses are on you the owner. At times hard to attain big sum of capital. The business can be easily ended by causes like death or physical impairment and other situations as well. Partnership is good because everything is shared down the line. All expenses and debts are 50/50. It’s more complicated to raise money as well as the...