Ryan Jobe
Chapter 2
Problems 1-11

1. An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?

Corporate Bond yield is 9%
The after tax yield is the return after taxes are deducted.
Therefore the bonds after tax yield = 9% (1-T) = 9% (1-.36)
Or 5.76%

2. Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds? You want the rate that equals the municipal tax exempt yield to the corporate after tax yield. 8% (1-T) = after tax corporate yield 6% = municipal tax exempt yield 8% (1-T) = 6% 8-8T =6 2=8T T=2/8 or 25%

3. Molteni Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million, and its tax rate was 40%. What was its interest expense?

Net Income = $6,000,000
Tax rate = 40%
EBT = NET Income/ (1-T) = $6,000,000/ (1-.40) = $10,000,000

EBT = EBIT – Interest Expense
EBT = $13,000,000 – $10,000,000 Interest expense = $3,000,000

4. Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

EBT = Net Income/ (1-T) = 2,400,000/ (1-.40) = $4,000,000
Tax = EBT * T = $4,000,000 * 40% = $1,600,000
Dep. & Amort. = Earning after Interest but before Depreciation – EBT
Dep & Amort. = $6,000,000 - $4,000,000 =$2,000,000

5. Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.

Net cash flow = Net income + Depreciation
Net Income = $3,100,000
Depreciation = $500,000