Mg 350 Financial Management Exam 1

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MG 350 Financial Management
Midterm Exam
Summer 2010

Name:_____Kim Schonebeck__________________________________Score:_____________ The following problems must be worked in the space provided. You MUST show all work to get any credit. (i.e. keystrokes, manual calculations etc.) The final answer should be circled. * My answers are in bold blue and a larger font size, I hope this makes it easier for you. -------------------------------------------------

1. Since the Tax Relief Act of 2003, if a corporation has pre-tax earnings of $110,000 while the corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal tax rate and a 15% capital gains tax rate, then what is the after-tax income that the investor could capture if all of the firm’s earnings are paid out in dividends?

Income $110,000
Less corp. profit tax(Tc =.35) $ 38,500
net income $ 71,500
cash dividends $71,500 {$110,000 x (1-.35)(1-.15)}
Less: Personal tax on dividends (Tcg =.15) $10,725

After- tax disposable income $60,775

2. William and Theodore have decided to start a travel business called Excellent Adventures. Since their business primarily involves time-travel their clients may be harmed during a small but significant portion of the travels. Consequently, William and Theodore would like a business form that will shield their personal wealth from any legal claims that the firm might be subject to after one of the travel mishaps. If William and Theodore are the only investors in this U.S. domiciled firm, which legal form of organization would be best for Excellent Adventures to protect both William and Theodore? Name the form and discuss briefly. Limited Liability company, (LLC), This form of business organization is best suitable because there is not any personal liability (limited) for William and Theodore , and this form of business still allows the benefit of taxation as partnerships.

3. Which of the following characteristics would disqualify a firm from being an S Corporation?
a. a firm with 51 different individual shareholders
b. the controlling majority shareholder is a Fortune 500 corporation
c. one of the shareholders of the proposed S Corporation is an elected official
d. none of the above would disqualify a firm from qualifying as an S Corporation

4. What of the following is FALSE regarding debt capital?
a.| Debt holders receive interest payments at fixed intervals.| b.| Debt holders receive the amount of their loan (called principal) at the debt’s maturity date.| c.| Debt holders can force the firm into bankruptcy if interest payments are not made.| d.| Debt holders have voting rights for the firm’s board of directors.|

5. Which of the following is FALSE regarding equity capital? a.| Common stock holders bear most of the firm’s business and financial risk.| b.| Preferred stock holders receive a fixed annual payment on their invested capital.| c.| Common stock holders have ownership in the firm by voting for the firm’s management.| d.| Preferred stockholders can force the firm into bankruptcy if dividend payments are not paid.|

Exhibit 2-1
The tax schedule for corporate income is shown in the table below:

Taxable Income Over| Not Over| Tax Rate|
$                0| $       50,000| 15.00%|          50,000|          75,000| 25.00%|          75,000|        100,000| 34.00%|        100,000|        335,000| 39.00%|
       335,000|        500,000| 34.00%|
  10,000,000|   15,000,000| 35.00%|
  15,000,000|   18,333,333|...
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