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Unformatted text preview: PROBLEM SET 3 SOLUTIONS Problem 1 Taxable income= operating income + interest received  interest paid + 30% of dividends received = 300,000 + 15,000  35,000 + .30(30,000) = 289,000 Tax liability = Tax on base + (tax rate)(excess over base) = 22,250 + .39(289,000  100,000) = 95,960 Problem 2 Note: Solution assumes the 3 year carryback/15 year carryforward rule (a) Firm has no tax liability in 2010 since taxable income is negative (b) Apply loss in current year to 3 prior years (starting with earliest year which is 2007) until loss is eliminated Note that 2006 is beyond the 3 year carryback limit And note the tax rate can be determined from the information given: Tax rate = Tax paid/Taxable income in years 20062009 = 20% Year 2006 Taxable income was 2000 Tax paid was 400 Adjusted taxable income is 2000 Adjusted tax due is 400 Year 2007 Taxable income was 6250 Tax paid was 1250 Adjusted taxable income is 0 Adjusted tax due is 0 Year 2008 Taxable income was 12500 Tax paid was 2500 Adjusted taxable income is 0 Adjusted tax due is 0 Year 2009 Taxable income was 6250 Tax paid was 1250 Adjusted taxable income is 3750 Adjusted tax due is 750 Year 2010 Taxable income was (21250) Tax paid was 0 Adjusted taxable income is 0 Adjusted tax due is 0 (c) Tax paid (20062009) = 400 + 1250 + 2500 + 1250 + 0 = 5400 Tax due (20062009) = 400 + 0 + 0 + 750 + 0 = 1150 Tax refund = Tax paid tax due = 5400 1150 = 4250 Problem 3 (Prob. 31) Given: NI = 3,000,000 EBIT = 6,000,000 T = 40% Need to set up an income statement and work from the bottom up: EBIT 6,000,000 INT (1,000,000) EBT 5,000,000 T (2,000,000) NI 3,000,000 EBT = NI / (1 T) = 3,000,000 / 0.6 = 5,000,000 Interest = EBIT EBT = 6,000,000 5,000,000 = 1,000,000 Problem 4 (Prob. 34) Action a: Will increase cash through the sale of common stock; this is a source of cash through financing activities Action b: Will decrease the amount of cash Action c: Normally, would decrease cash; however, it is possible the action would increase cash if the firm receives a tax refund. Action d: Will decrease the amount of cash Problem 5 (Prob. 35) Given: DIV = 22,500,000 RE(t  1) = 212,300,000 RE(t) = 278,900,000 RE(1) = ( Net income) + DIV so NI = RE(1)  RE(0) + DIV = 278,900,000  212,300,000 + 22,500,000 = 89,100,000 Problem 6 (Prob. 41) Given: DSO = 40 days Sales = 7,300,000 DSO = AR / (Sales/365) so AR = (DSO)(Sales) / 365 = (40)(7,300,000) / 365...
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 Fall '11
 Peake
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