# Fi515 Week 1

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)

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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%

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