# chapter2_probs - Finance 254 Chapter Two Problems From...

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Finance 254 Chapter Two Problems From Previous Exams Problem 1. 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] \$18,000,000 - Interest expense - \$2,000,000 [\$20,000,000 * 10%] = Earnings before Taxes [EBT] = \$16,000,000 - Tax liability - \$5,530,000 = Net income = \$10,470,000 Computing the tax liability from marginal rates: The takeaway : 1. Dividends are not a tax deductible expense! 2. Computing tax liability requires decomposing taxable income into amounts corresponding to marginal tax rates Corporate Tax Rates Rate Income Level 15% \$0 - \$50,000 25% \$50,001 - \$75,000 34% \$75,001 - \$100,000

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## This note was uploaded on 09/19/2009 for the course FIN FIN 221 taught by Professor Fin221 during the Fall '09 term at University of Illinois, Urbana Champaign.

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chapter2_probs - Finance 254 Chapter Two Problems From...

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