Fi515 Week 1

Question (2-6) 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?
New Balance retained earning = Previous Balance retained earning + net income + Dividend paid
Dividend paid = Previous Balance retained earning + net income - New Balance retained earning
Dividend = $780 million + $50 million - $810 million = $830 million - $810 million = $20,000,000

Question (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.
a) What are the firm’s income tax liability and its after-tax income?
b) What are the company’s marginal and average tax rates on taxable income?
For a corporation, 70% of dividends received are excluded from taxes; so taxable dividends are calculated with the remained 30%
Company’s Tax Liability:
Taxable operating income $ 365,000
Taxable interest ($ 50,000)
Taxable dividend received $ 4,500
15,000 * (1 – 0.70)
Total taxable income $ 319,500
The marginal rate for this company is 39%
The non-taxable dividends are: $15,000 * 0.7 = $ 10,500

The tax is:
Tax Liability = $ 22,250 + (319,500 – 100,000)*0.39 = $ 107,855
After Tax-income:
Taxable income $ 319,500
Taxable ($ 107,855)
Non-taxable dividend
Received 15,000 * (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 %

Question (2-9)
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%. Shrieves’ corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates returns on all three securities
Investment = $ 10,000
AT&T bonds = 7.5%
State of Florida muni bonds = 5%
AT&T preferred stock = 6 %
Corporate tax rate = 35%

After Taxes
AT&T bond = 0.075 * 10000 = $ 750
Taxes = 750 * 0.35 = $ 262.50
$ 750 – 262.50 = $487.50
Yield AT&T bond = 487.50 / 10,000 = 0.04875 *100% = 4.875 %
Yield AT&T bond = 4.875 %

AT&T preferred stock = 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
Yield = 537 / 10000 = 0.0537 * 100% = 5.37%
Yield AT&T preferred stock = 5.37 %

State of Florida muni bonds = 5%
Muni bonds =10000 * 0.05 = $500
They are not taxable, therefore no deductions were performed
Yield = $500 / 10000 = 0.05 * 100 % = 5 %
Yield State of Florida muni bonds = 5%