Progressive Tax and Net Income

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QUESTIONS:
(2-3)Little Books Inc. recently reported $3m of net income. Its EBIT was $6m, and its tax was 40%. What was
its interest expense?

ANSWER:Net Income$3 MillionEBIT$6 Million
Divided by0.6Less IBT$5 Million
Income before Taxes$5 MillionInterest Expense$1 Million
**Interest Expense = $1M**

(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 income tax liability and its after-tax income? What are the
company's marginal and average tax rates on taxable income?

ANSWER:Income365,000
Less Interest 50,000Dividends Recv'd15,000
315,000% of Taxable 0.3
Plus: Dividends received4,500Taxable Dividends4500
Taxable income319500
% of Non-taxable 0.7
Tax Amount =$22,250 Non-taxable Dividends10500
Taxable Income Range100,000
% on the Excess Over the Base0.39
Taxes = $22,250 + 0.39 ($319,500 - $100,000)
22,250 +$219,500 x 0.39
22,250 +$85,605
Total Taxes = $107,855

After-tax income$211,645
Net Income$222,145

Marginal tax rate=39%
Average tax rate=34%

(2-10)The Moore Corporation has operting income (EBIT) of $750,000. The company's depreciation expense
is $200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company's net
income? What is its net cash flow?
ANSWER:EBIT750,000EBIT-Interest=EBT-Taxes=NI
INTEREST0
EBT750,000
Taxes40%
300,000
NET INCOME450,000NCF = NI + Depreciation & Amortization
DEPRECIATION200,000
NET CASH FLOW (NCF)650,000
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