Mg 350 Financial Management Exam 1
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
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