Spring 2010 Chapter 3 Assigned Problems0001

Spring 2010 Chapter 3 Assigned Problems0001 - Assigned...

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Unformatted text preview: Assigned Problems: Chapter 3 - Financial Statements, Cash flow and Taxes 3-1 An investor recently purchased a corporate bond which yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the band’s after-tax yield? 9? 571% . k C m @nIm-p 7.2;; 530 Wax Mao o§P29o )4 (3:53240 a; -¢.3L41 = F5 .10 4d: Mic/mic a” ‘ftflm $3137.“ Mm: :- 5%'/. f“ 9 3-2 Corporate bonds issu d by Johnson Corporation currently yield 8%. Municipal bonds of equal risk current yield 6%. At what tax rate would an investor be indifferent between 6% mgr 7h malt ‘ Wjudb‘lfln mam/Wm mm») 741+: 10/: mania? W % gggll—T) = 4% 3’4"“ T 0 3-97:; 5; 42:37:77'=°3§9°°75/ 3-6 In its most recent financial statements, Newhouse Inc., reported $50 million of net income and $810 million in retained earnings. The previous retained earnings were $780 million. How much in dividends was paid to shareholders during the year? NI, 50min,“ 3 may”: 4310 ml)”; 3 [25% Q :¢7g¢m,//,.». APE 2 WI» 5720 = ¢3Dmvllle (mfimiy Jigsaw dw 7h NI 90 “om/1m _-; 9mm: + RE '5 W“ 5‘0 .: :DIVIXNIQS‘f" ‘30 . ’9”th c 020m1//Iv< 3-9 The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida municipal bonds, which yield 5%, and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax returns on these securities. . . , M, ,...PéM=5‘% WWW—@332 7.sw«ss>~ W fihflfcwW Whig .0: wfimlzufléwkflé bu ¢lz ). . errwi we 7°34 W 5M?" @571 $40442 = 4ng do ma, rim. IN. , , d, [w -_—; 7550—- ”L.& =’- “5379 - 3&3], ‘ m: WWW.— ,.. M 3-10 The Moore Corporation has operating income (EBIT) of $750,000. The company's depreciation expense is $200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company’s net income? What is its net cash flow? Z511": § .5ng 356): fouo/m Mel at; a Mo )efiiwgfeM/W /' R : 4W . +2 y.) M...” (>23. 63%“ i 35” 550,6“ 0245:7599 = fl: W43?” 33o,m f 534: m #10 .— 33o,m+o2®v/W I flezfas/A F M 4, 3,, ((9 420%”, 992-29»; arms; 3-11 The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndt's federal-plus-state tax rate is 40%. Berndt has no debt. 3. Set up an income statement — what is Berndt’s expected net cash flow? , $12. my“; ifi(%§g New. ( 7 MM) ( 7 $5" " ’5’ a”) ‘36,) ( 1.5' flit/lid.) . f /o5 [hi/ll“; ‘ 0’. .. [v 0Z3 {9 mil)”: W‘f90ym NI . fl/ci' fixh 13/00 «1 f9n,m *- 79,811!" '= folk/“tum b. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled [e.g. similar to straight |ine=-) MACRS]. No changes in operations occurred. What would happen to reported profit and net cash flow? a? ZET g $7 715‘!) 0 :5 f I 1:» NI+ Map 3 m// 0+? fit film [flaw/3:955 5k 532%! by A0? = 7(5)? == .MS‘MW/fit) = flaym c. Now, suppose Congress instead of doubling Berndt's depreciation, reduced it by 50%. How would profit and net cash flow be affected? J2 definwfid ' M507. ZbrwnDJ/nwméj SO” x LS" mil/1.» =‘ 937mm Nae €67" = /.S‘+ 75': 425ml”? M7545 = 4934 x 07,2: m.//,.: :: .9ml/1n %o,m ATW 2 Pfififlm «Rn/m : P‘Jn/m ’1‘ New rivan Fina = (Ms-.9) +- ,7: = calm/m 7 M02le P/m 44am 2 ..5 mmw . d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why? More importantly, what would be the logic and rationale for either Congress doubling or having depreciation expenses? Mama? Am; My? [a 4m mm?) 27%? 75 US$449 Aé; WWW => QVMM7‘87'ZL9WM76 w/flefim) M,//M7éu47w5u 6m flow QAALM 7la 9mm; gum gm 0,: Maw/Wam- //D film/Wins 01 47b! ‘ .9424 A3,; ; nmfi gm 7%» MW 6;, fld’acc-Jmfig dLWUJkk Wm gr” flag/L g/(Mo “)‘b Wm 34/20:: 7L0 mnwc‘) mam WWW, m mm. Miami/>149 Myer; ( Mum fcauukmmL/m, More §6é~p Mfifi,&> (18‘- maé/Vleulfll’m gum? nwwd, /m/mruc: MM?ch =7 7L J'Q/M SIM/"3 "my 7"? W 3’ 7% £190.; [mm/.3. pug g6, A; 01?; 991 § JMa/Im/L .. ...
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Spring 2010 Chapter 3 Assigned Problems0001 - Assigned...

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