Chapter Two Problems From Previous Exams
In 2001 Homer Inc. expects operating income (earnings before interest and taxes) of
$18,000,000. In addition, the corporation has $20,000,000 of debt outstanding with a 10% interest rate and
will pay $1,000,000 in dividends to its common stockholders.
Assume that Homer Inc. will receive no
other sources of income during 1995.
What is Homer’s net income for 2001?
Summary 2001 Income Statement for Homer Inc.:
Earnings before Interest and Taxes [EBIT]
[$20,000,000 * 10%]
Earnings before Taxes [EBT]
Computing the tax liability from marginal rates:
The takeaway :
1. Dividends are
a tax deductible expense!
2. Computing tax liability requires decomposing taxable income into amounts
corresponding to marginal tax rates
Corporate Tax Rates
$0 - $50,000
$50,001 - $75,000
$75,001 - $100,000