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Unformatted text preview: ties. The overthe-counter exchange, a telecommunications network, offers a secondary market for securities and is
a primary market in which new public issues are
sold. Important debt and equity markets—the
Eurobond market and the international equity marLG5 CHAPTER 1 ket—exist outside of the United States. The securities exchanges create continuous liquid markets for
needed financing and allocate funds to their most
Discuss the fundamentals of business taxation
of ordinary income and capital gains, and explain the treatment of tax losses. Corporate income
is subject to corporate taxes. Corporate tax rates
LG6 SELF-TEST PROBLEMS The Role and Environment of Managerial Finance 35 are applicable to both ordinary income (after deduction of allowable expenses) and capital gains. The
average tax rate paid by a corporation ranges from
15 to nearly 35 percent. (For convenience, we assume a 40 percent marginal tax rate in this book.)
Corporate taxpayers can reduce their taxes through
certain provisions in the tax code: intercorporate
dividend exclusions, tax-deductible expenses, and
tax loss carrybacks and carryforwards. (Solutions in Appendix B) ST 1–1 Corporate taxes Montgomery Enterprises, Inc., had operating earnings of
$280,000 for the year just ended. During the year the firm sold stock that it held
in another company for $180,000, which was $30,000 above its original purchase price of $150,000, paid 1 year earlier.
a. What is the amount, if any, of capital gains realized during the year?
b. How much total taxable income did the firm earn during the year?
c. Use the corporate tax rate schedule given in Table 1.4 to calculate the firm’s
total taxes due.
d. Calculate both the average tax rate and the marginal tax rate on the basis of
your findings. LG1 LG6 1–1 Liability comparisons Merideth Harper has invested $25,000 in Southwest
Development Company. The firm has recently declared bankruptcy and has
$60,000 in unpaid debts. Explain the nature of paym...
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- Fall '13