# Fin 370 Wk 2 Ch 3

Submitted By vmcclusky
Words 3231
Pages 13
Chapter 3
Understanding Financial Statements,
Taxes, and Cash Flows

3-1. To find the net income, we must subtract all relevant expenses from revenues: cost of goods sold, operating expenses, interest, and taxes. Following the template from Checkpoint 3.1, we find the following for Sandifer Manufacturing Company:

[pic]

Sandifer was able to generate \$438,750 in net income from its sales of \$4.5M. The \$438,750 is now available to pay out to shareholders (dividends), and/or to reinvest in the business (retained earnings).

3-2. We just learned (in Problem 3-1) that Sandifer has \$438,750 to allocate to dividends and reinvestment. If it chooses to reinvest \$50,000, then it will have (\$438,750 − \$50,000) ’ \$388,750 to pay out as dividends (a [\$388,750/\$438,750] ’ 88.6% payout ratio).

3-3. Marifield Steel Fabrication earned net income of \$500,000, then paid out a dividend of \$300,000. This left (\$500,000 − \$300,000) ’ \$200,000 to be retained by the firm to finance growth.

However, earnings per share is based on net income, not reinvested earnings. Thus, the firm’s EPS is:

[pic] 3-4. Barrington Enterprises earned \$4M in taxable income. Using the corporate tax rates given in Section 3.3 of the chapter, we find the following:

[pic]

Barrington’s total tax liability is \$1,360,000, for an average tax rate of (\$1,360,000/\$4,000,000) ’ 34%.

The chart above is very close to that in Section 3.3. However, we will explain the entries, using the calculations for bracket #3 (highlighted in the chart) as an example:

Bracket #3 is shown in the text to apply to taxable income between \$75,001 through \$100,000. Thus, the bracket applies to \$25,000, which is what we have entered in the “(marginal) taxable income” column. The “cumulative income taxed” column shows \$100,000, meaning that when we have moved...

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