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Statement of Retained Earnings

Statement of Retained Earnings - • We assume that new...

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3. Statement of Retained Earnings Earnings are either paid to stockholders ( dividends ) or reinvested in the firm ( retained earnings ). 1
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Taxes Corporate income tax rates for 2005-2011 are: 2 Tax Rate $0 $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% $10,000,001 $15,000,000 35% $15,000,001 $18,333,333 38% $18,333,334 + 35% Taxable Income
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Taxes There are two ways to calculate taxes: Average Tax Rate Taxes ÷ Taxable Income Marginal Tax Rate Tax on an incremental dollar of earnings 3
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Taxes In making financial decisions, we are concerned with marginal taxes
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Unformatted text preview: . • We assume that new decisions affect incremental income and, therefore, incremental taxes are above and beyond what was already being paid in taxes by the firm. 4 Average vs. Marginal Tax Rates • In Finance, we are concerned with marginal tax rates, since we are usually evaluating new (incremental) cash flows. 5 Tax Rate Affected Earnings Taxes 0.15 $50,000 $7,500 0.25 $25,000 $6,250 0.34 $25,000 $8,500 0.39 $100,000 $39,000 $200,000 $61,250 Average Tax Rate = $61,250 / $200,000 = 30.63% Marginal Tax Rate = 39%...
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