Question (2-6) In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends was paid to shareholders during the year? New Balance retained earning = Previous Balance retained earning + net income + Dividend paid Dividend paid = Previous Balance retained earning + net income – New Balance retained earning Dividend = $780 million + $50 million – $810 million = $830 million – $810 million = $20,000,000 Question (2-7)

The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. a)What are the firm’s income tax liability and its after-tax income? b)What are the company’s marginal and average tax rates on taxable income? For a corporation, 70% of dividends received are excluded from taxes; so taxable dividends are calculated with the remained 30% Company’s Tax Liability: Taxable operating income $ 365,000 Taxable interest ($ 50,000)

Taxable dividend received $ 4,500 15,000 * (1 – 0. 70) Total taxable income $ 319,500 The marginal rate for this company is 39% The non-taxable dividends are: $15,000 * 0. 7 = $ 10,500 The tax is: Tax Liability = $ 22,250 + (319,500 – 100,000)*0. 39 = $ 107,855 After Tax-income: Taxable income $ 319,500 Taxable ($ 107,855) Non-taxable dividend Received 15,000 * (0. 70) $ 10,500 Net income $ 222,145 Average tax rate = Taxable interest income / Taxable operating income = 107855 / 319500 = 0. 37574 *100% = 33. 7574 = 33. 76 % Average tax rate is 33. 8 % ? Question (2-9) 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 muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’ corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates returns on all three securities Investment = $ 10,000 AT&T bonds = 7. 5% State of Florida muni bonds = 5% AT&T preferred stock = 6 % Corporate tax rate = 35% After Taxes

AT&T bond = 0. 075 * 10000 = $ 750 Taxes = 750 * 0. 35 = $ 262. 50 $ 750 – 262. 50 = $487. 50 Yield AT&T bond = 487. 50 / 10,000 = 0. 04875 *100% = 4. 875 % Yield AT&T bond = 4. 875 % AT&T preferred stock = 0. 06 * 10000 = $600 Tax exemption 70% = 600 * 0. 7 = $ 420 Taxable = $600 – $420 = $ 180 Taxes = $ 180 * 0. 35 = $ 63 in taxes $ 600 – $ 63 = $ 537 Yield = 537 / 10000 = 0. 0537 * 100% = 5. 37% Yield AT&T preferred stock = 5. 37 % State of Florida muni bonds = 5% Muni bonds =10000 * 0. 05 = $500 They are not taxable, therefore no deductions were performed Yield = $500 / 10000 = 0. 05 * 100 % = 5 % Yield State of Florida muni bonds = 5%