FIN 300 Fin Ratios 4 Marginal Tax Rates 1M x 010 01M 2M x 020 04M 3M x 030 09M

Fin 300 fin ratios 4 marginal tax rates 1m x 010 01m

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FIN 300 - Fin Ratios 4
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Marginal Tax Rates $1M x 0.10 = $0.1M + $2M x 0.20 = $0.4M + $3M x 0.30 = $0.9M + $2M x 0.40 = $0.8M = $2.2M tax to be paid! FIN 300 - Fin Ratios 5
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Average Tax Rate Using the previous info, what is the “average” tax rate paid by the firm? Answer: Divide the $2.2M in taxes by the $8M in taxable income Average Tax Rate = $2.2M/$8M = 0.275 = 27.5% FIN 300 - Fin Ratios 6
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Retained Earnings Calculations When a firm earns net income (available to common, that is), the net income (or, earnings) goes 1 of 2 places: 1) Either to pay (common) dividends 2) Or, back on the balance sheet, added to the previous year’s “retained earnings” FIN 300 - Fin Ratios 7
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Retained Earnings Calculations Example: Given…… Previous year’s (balance sheet) retained earnings = $5M This year’s net income is $2M Dividends paid this year in the amount of $500k What are the retained earnings on the balance sheet at the end of the current year? FIN 300 - Fin Ratios 8
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Retained Earnings Calculation Net Income = Dividends + Chg. in Ret. Earn (RE) Net Income = Dividends + (New RE – Old RE) $2M = $0.5M + New RE - $5M $2M - $0.5M + $5M = New RE $6.5M = New RE! FIN 300 - Fin Ratios 9
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Retained Earnings Calculations Another example: Given: NI = -$3M, Dividends = $1M, New RE = -$6M What must have been the old (last year’s) RE on the balance sheet? FIN 300 - Fin Ratios 10
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Retained Earnings Calculations NI = -$3M, Dividends = $1M, New RE = -$6M NI = Dividends + (New RE – Old RE) -$3M = $1M - $6M – Old RE $2M = - Old RE Old RE = -$2M! FIN 300 - Fin Ratios 11
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Retained Earnings Calculations A few points…. Dividends are always zero or positive (there is no such thing as a negative dividend) However, earnings (NI, that is) and RE (on the balance sheet) may be negative Yes, dividends may be paid in an amount greater than net Income and dividends may be paid, even when net income is negative! FIN 300 - Fin Ratios 12
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