# Hw Fin515

Topics: Income tax, Progressive tax, Taxation Pages: 3 (352 words) Published: February 13, 2013
Page 80

2-6 Statement of Retained Earnings

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?

In millions

780 Previous retained earnings

50 Net Income

830

810 Retained earnings

20 million in dividends was paid to shareholders during the year

2-7 Corporate Tax Liability

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 income tax liability and its after-tax income? What are the company’s marginal and average tax rates on table income?

Income365,000

LESS: Interest Charges(50,000)

Taxable income: 319,500

*In addition, 70% of dividends received are excluded from taxes 15,000 (1-.7) = \$4,500

Tax22,250 + 0.39 (319,500 – 100,000)

22,250 + 85,605 = 107,855

After Tax Income:

Taxable Income319,000

LESS: Taxes (107,855)

222,145

*Non-taxable dividends 15,000 x 0.7 = \$10,500

Marginal tax rate is 39%

Average is 107,855/319,500 = 33.76%, rounded at 33.8%

2-9 Corporate After-Tax Yield

The Shrieves Corporation has \$10,000 that it plans to invest in marketable securities. 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%. Shrieve’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.

AT&T bonds

7.5% (1-0.35)...