Wk 1 Fi 505

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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 dividends was paid to shareholders during the year?
Net Income = 50 million
Retained Earnings = 810 million
Retained Earnings beginning of the year = 780 million
Amount of RE generated this year = 810 – 780 = 30 million
NI = Dividends + RE
50 million = Dividends + 30 million
Dividends= 50 – 30 = 20 million
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 $50000 (2) dividends received of $15,000 (3) dividends paid of $25000 and (4) income taxes. What are the firms income tax liability and its after tax income? What are the company’s marginal and average tax rates on taxable income?
Income $365,000

Less Interest deduction (50,000)

Plus: Dividends received 4,500

Taxable income $319,500
For a corporation, 70% of dividends received are excluded from taxes; therefore, taxable dividends are calculated as $15,000(1 – 0.70) = $4,500.

Tax = $22,250 + ($319,500 – $100,000) (0.39) = $22,250 +$85,605 = $107,855

After-tax income: Taxable income $319,500 Taxes (107,855)

Plus: Non-taxable dividends received 10,500 Net income $222,145

Non-taxable dividends are calculated as $15,000 × 0.7 = $10,500. The company’s marginal tax rate is 39%. The company’s average tax rate is $107,855/$319,500 = 33.76%

2-9 – Corporate after tax yield

The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among ATT bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but not taxable), and ATT preferred stock, which a dividend yield of 6%. Shrieves corporate tax rate is 35% and 70% of the dividends are tax exempt. Find the after tax rates of return on all three

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