HW Assignment Week 1

# HW Assignment Week 1 - The Talley Corporation had a taxable...

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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 liabiity and its after-tax income. What are the company's marginal and average tax rates on taxable income. Income after operating costs: \$365,000.00 Less: Interest Expense (\$50,000.00) Plus: Taxable Dividends Received \$4,500.00 Only 30% of the \$15,000 in dividends are taxable. Taxable Income: \$319,500.00 \$319,500 falls into the \$100,000 to \$335,000 bracket so the corporate tax woud be: \$22,250 + .39 (\$319,500 - \$100,000) Base Amount plus marginal rate x difference between taxable income - lower base Tax Liability = \$107,855.00 Talley's marginal tax rate is 39% the rate on the last dollar of income subject to tax. Talley's average tax rate is: Tax Liability / Amount of Income Subject to Tax Average Tax Rate = \$107,855/\$319,500 = 33.76%

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The Wendt Corporation had \$10.5 million of taxable income. a. What is the company’s federal income tax bill for the year? T= 3,400,000 + (10,500,000-10,000,000)x 35%= \$3,575,000 b. Assume the firm receives an additional \$1 million of interest income from some bonds it owns. What is the tax on this interest income? T = 1,000,000 x 0.35 = \$350,000 c. Now assume that Wendt does not receive the interest income but does receive an additional \$1 million as dividends on some stock it owns. What is the tax on this dividend income? T= (1,000,000 x 0.3) x 0.35 = \$105,000
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 yiel and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return o AT on bond: AT yield = 7.5% - T = 7.5% - 7.5% x0.35 = 4.875% Invest 10,000 = > interest = 10,000 x 0.075 = \$750 Income = 750(1-T) = 750(1-0.35) = \$487.5 Rate of return = \$487.5/\$10,000 = 4.875% AT&T preferred stock: Yield = 0.06 – T = 0.06 – 0.3x0.06x0.35 = 5.37% => invest in the preferred stock

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ld 5% (but are not taxable), on all three securities.
The Moore Corporation has operating income (EBIT) of \$750,000. The company’s depreciation expense is \$200,000. What is its net cash flow?

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