F1505 Homework Week One

F1505 Homework Week One

FI 515
Chapter 2
Exercises 2.6; 2.7; 2.9
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 million

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% (page 72 of the book).

Company’s Tax Liability:
Taxable operating income   $ 365,000
Taxable interest ($   50,000)
Taxable dividend received$     4,500
15000*(1 – 0.70)
Total taxable income$ 319,500

The marginal rate for this company is 39% (this information is in the corporate tax rate table in page 71)
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 ($ 107855)
Non-taxable dividend
Received 15000*(0.70)   $   10,500
Net income $ 222,145

Average tax rate = Taxable interest income / Taxable operating income
                          = 107855 / 319500 = 0.337574 *100%
                          = 33.7574 = 33.76 %
Average tax rate is 33.8 %

2.9 The Shrieves Corporation has $10,000 that it plans to invest in marketable...

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