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# Ch02sol - Taxes Corporate tax rates in effect for 2007 are...

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Taxes Corporate tax rates in effect for 2007 are shown in Table 2.3. Table 2.3 A peculiar feature of taxation instituted by the Tax reform act of 1986 and expanded in the 1993 Omnibus Budget Reconciliation Act is that corporate tax rates are not strictly increasing. As shown, corporate tax rates rise from 15% to 39%, but drop back to 34% on income over \$335,000. They then rise to 38% and subsequently fall to 35%.

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H2.2. Solution to Problem 2.6, 2.7 2.6. Calculating Taxes: The Herrera Co. had \$273,000 in 2007 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2007 income taxes. Taxes = 0.15(\$50K) + 0.25(\$25K) + 0.34(\$25K) + 0.39(\$273K – 100K) = \$89,720 2.7. Tax Rates: In problem 6, what is the average tax rate? What is the marginal tax rate? The average tax rate is the total tax paid divided by net income, so: Average tax rate = \$89,720 / \$273,000 = 32.86%. The marginal tax rate is the tax rate on the next \$1 of earnings, so: Marginal tax rate = 39%.
H2.3. Solution to Problem 2.11, 2.12 2.11. Cash Flow to Creditors: The 2006 balance sheet of Anna’s Tennis Shop showed long-term debt of 2.8 million rubles, and the 2007 balance sheet showed long-term debt of 3.1 million rubles. The 2007 income statement showed an interest expense of 340,000 rubles. What was the firm’s cash flow to creditors during 2007? Cash flow to creditors = Interest paid – Net new borrowing = RUR 340K – (LTDend – LTDbeg) = RUR 340K – (RUR 3.1M – 2.8M) = RUR 340K – 300K = RUR 40K 2.12. Cash Flow to Stockholders: The 2006 balance sheet of Anna’s Tennis Shop showed 820,000 rubles in the common stock account and 6.8 million rubbles in the additional paid-in surplus account. The 2007 balance sheet showed 855,000 rubles and 7.6 million rubles in the same two accounts,

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