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BUAD notes - Practice Problems for Chapter 2 5 To find the...

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Practice Problems for Chapter 2 5. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get: CA = NWC + CL = $410,000 + 1,300,000 = $1,710,000 The market value of current assets and fixed assets is given, so: Book value CA = $1,710,000 Market value CA = $1,800,000 Book value NFA = $2,600,000 Market value NFA = $3,700,000 Book value assets = $4,310,000 Market value assets = $5,500,000 6. Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($325 – 100K) = $110,000 7. The average tax rate is the total tax paid divided by net income, so: Average tax rate = $110,000 / $325,000 = 33.85% The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate = 39%. 9. Net capital spending = NFA end – NFA beg + Depreciation = $5.2M – 4.6M + 875K = $1.475M 15. The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to ret. earnings = $1,200 + 4,300 = $5,500 Now, looking at the income statement: Taxable Income – Taxable Income × Tax rate = Net income Recognize that Taxable Income × tax rate is simply the calculation for taxes. Solving this for Taxable Income yields: Taxable Income = NI / (1– tax rate) = $5,500 / (1 – 0.35) = $8,462
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