Discuss the fundamentals of business taxation of

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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 productive uses. 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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