Ch 1 and 2 homework solutions

Ch 1 and 2 homework solutions - FINANCIAL MANAGEMENT...

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FINANCIAL MANAGEMENT CHAPTERS 1 and 2 HOMEWORK SOLUTIONS 1-5 a. In this case the employee is being compensated for unproductive time. The company must pay someone to take her place during her absence. Installation of a time clock that must be punched by the receptionist every time she leaves work and returns would result in either: (1) her returning on time or (2) reducing the cost to the firm by reducing her pay for the lost work. b. The costs to the firm are in the form of opportunity costs. Money budgeted to cover the inflated costs of this project proposal is not available to fund other projects that may help to increase shareholder wealth. Make the management reward system based on how close the manager’s estimates come to the actual cost rather than having them come in below cost. c. The manager may negotiate a deal with the merging competitor that is extremely beneficial to the executive and then sell the firm for less than its fair market value. A good way to reduce the loss of shareholder wealth would be to open the firm up for purchase bids from other firms once the manager makes it known that the firm is willing to merge. If the price offered by the competitor is too low, other firms will up the price closer to its fair market value. d. Generally part time or temporary workers are not as productive as full-time employees. These workers have not been on the job as long to increase their work efficiency. Also, the better employees generally need to be highly compensated for their skills. This manager is getting rid of the highest cost employees to increase profits. One approach to reducing the problem would be to give the manager performance shares if they meet certain stated goals. Implementing a stock incentive plan tying management compensation to share price would also encourage the manager to retain quality employees. 1-7 a. Tax calculations using Table 1.4: $10,000: Tax liability: $10,000 × 0.15 = $1,500 After-tax earnings: $10,000 – $1,500 = $8,500 Average tax rate: $1,500 ÷ $10,000 = 15% $80,000: Tax liability: $13,750 + [0.34 × (80,000 – $75,000)] $13,750 + (0.34 × $5,000) $13,750 + $1,700 $15,450 = Total tax After-tax earnings: $80,000 – $15,450 = $64,550 Average tax rate: $15,450 ÷ $80,000 = 19.3% $300,000: Tax liability: $22,250 + [0.39 × ($300,000 – $100,000)] $22,250 + (0.39 × $200,000) $22,250 + $78,000 $100,250 = Total tax After-tax earnings: $300,000 – $100,250 = $199,750 Average tax rate: $100,250 ÷ $300,000 = 33.4%
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$500,000: Tax liability: $113,900 + [0.34 × ($500,000 – $335,000)] $113,900 + (0.34 × $165,000) $113,900 + $56,100 $170,000 = Total tax After-tax earnings: $500,000 – $170,000 = $330,000 Average tax rate: $170,000 ÷ $500,000 = 34% $1,500,000: Tax liability: $113,900 + [0.34 × ($1,500,000 – $335,000)] $113,900 + (0.34 × $1,165,000) $113,900 + $396,100 $510,000 = Total tax After-tax earnings: $1,500,000 – $510,000 = $990,000 Average tax rate: $510,000 ÷ $1,500,000 = 34% $10,000,000:
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This note was uploaded on 07/18/2011 for the course FINANCE 330 taught by Professor Nichols during the Summer '11 term at Maryland.

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Ch 1 and 2 homework solutions - FINANCIAL MANAGEMENT...

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