As income increases to 335000 the marginal tax rate

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As income increases to $335,000, the marginal tax rate approaches and peaks at 39%. For income in excess of $335,000, the marginal tax rate declines to 34%, and after $10 million the marginal rate increases slightly to 35%. P1-9. LG 6: Interest versus dividend income Intermediate a. Tax on operating earnings: $490,000 × 0.40 tax rate = $196,000 b. and c
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20 Gitman • Principles of Managerial Finance, Twelfth Edition (b) Interest Income (c) Dividend Income Before-tax amount $20,000 $20,000 Less: Applicable exclusion 0 14,000 (0.70 × $20,000) Taxable amount 20,000 6,000 Tax (40%) 8,000 2,400
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Chapter 1 The Role and Environment of Managerial Finance 21 After-tax amount 12,000 17,600
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22 Gitman • Principles of Managerial Finance, Twelfth Edition d. The after-tax amount of dividends received, $17,600, exceeds the after-tax amount of interest, $12,000, due to the 70% corporate dividend exclusion. This increases the attractiveness of stock investments by one corporation in another relative to bond investments. e. Total tax liability:
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Chapter 1 The Role and Environment of Managerial Finance 23 Taxes on operating earnings (from (a) ) $196,000 + Taxes on interest income (from (b) ) 8,000 + Taxes on dividend income (from (c) ) 2,400
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24 Gitman • Principles of Managerial Finance, Twelfth Edition Total tax liability $206,400
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Chapter 1 The Role and Environment of Managerial Finance 25 P1-10. LG 6: Interest versus dividend expense Intermediate
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26 Gitman • Principles of Managerial Finance, Twelfth Edition a. EBIT $40,000 Less: Interest expense 10,000 Earnings before taxes $30,000 Less: Taxes (40%) 12,000
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Chapter 1 The Role and Environment of Managerial Finance 27 Earnings after taxes * $18,000
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28 Gitman • Principles of Managerial Finance, Twelfth Edition * This is also earnings available to common stockholders.
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Chapter 1 The Role and Environment of Managerial Finance 29 b. EBIT $40,000 Less: Taxes (40%) 16,000 Earnings after taxes $24,000 Less: Preferred dividends 10,000 Earnings available for
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30 Gitman • Principles of Managerial Finance, Twelfth Edition common stockholders $14,000
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Chapter 1 The Role and Environment of Managerial Finance 31 P1-11. LG 6: Capital gains taxes Basic a. Capital gain: Asset X = $2,250 – $2,000 = $250 Asset Y = $35,000 – $30,000 = $5,000 b. Tax on sale of asset: Asset X = $250 × 0.40 = $100 Asset Y = $5,000 × 0.40 = $2,000 P1-12. LG 6: Capital gains taxes Basic (a) and (b)
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32 Gitman • Principles of Managerial Finance, Twelfth Edition Asset Sale Price (1) Purchase Price (2) Capital Gain (1) – (2) (3) Tax (3) × 0.40 (4) A $3,400 $3,000 $400 $60 B 12,000 12,000 0 0 C 80,000 62,000 18,000 7,200 D 45,000 41,000 4,000 1,600
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Chapter 1 The Role and Environment of Managerial Finance 33 E 18,000 16,500 1,500 600
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34 Gitman • Principles of Managerial Finance, Twelfth Edition P1-13. LG 4: Ethics problem Intermediate Maximizing shareholder wealth, or the stock price, involves carefully evaluating each decisions impact on cash flow amount, timing, and risk. However, that statement includes nothing that directly incorporates the ethical aspect of decisions. The phrase “subject to ethical constraints” implies that there are ethical facets of business decisions that may or may not be a significant part of a decision’s cash flow projections. Think of all decisions being sifted through an “ethical
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