B E F 2013 $6.00 100,000 40% $40,000 2014 $12.17 250,000 40% $40,000 1946802 $7,282 $20,000 $632,160 $1,287,360 $1,946,802 $1,202,950 $263,160 $939,790 $2,886,592 2680112 $14,000 $71,6321 $878,000 $1,716,480 $2,680,112 $1,220,000 $383,160 $836,8401 $3,516,952 A B D 1 Input Data: 2 2012 3 Year-end common stock price $8.50 4 Year-end shares outstanding 100,000 5 Tax rate 40% 6 Lease payments $40,000 7 8 Balance Sheets 9 10 11 Assets 1124000 12 Cash and equivalents $9,000 13 Short-term investments $48,600 14 Accounts receivable $351,200 15 Inventories $715,200 16 Total current assets $1,124,000 17 Gross Fixed Assets $491,000 18 Less Accumulated Dep. $146,200 19 Net Fixed Assets $344,800 20 Total Assets $1,468,800 21 22 Liabilities and equity 23 Accounts payable $145,600 24 Notes payable $200,000 25 Accruals $136,000 26 Total current liabilities $481,600 27 Long-term bonds $323,432 28 Total liabilities $805,032 29 Common stock (100,000 share $460,000 30 Retained earnings $203,768 31 Total common equity $663,768 32 Total liabilities and equity $1,468,800 33 34 Income Statements 35 36 1124000 37 Net sales $3,432,000 38 Costs of Goods Sold Except De $2,864,000 39 Depreciation and amortization $18,900 40 Other Expenses $340,000 41 Total Operating cost $3,222,900 42 Earnings before interest and ta $209,100 43 Less interest $62,500 44 Pre-tax earnings $146,600 45 Taxes (40%) $58,640 46 Net Income before preferred d $87,960 47 EPS $0.880 48 DPS $0.220 49 Book Value Per Share $6.638 50 $324,000! $720,000 $284,960 $1,328,960 $1,000,000 $2,328,960 $460,000 $97,632 $557,632 $2,886,592 $359,800 $300,000 $380,000 $1,039,800 $500,000 $1,539,800 $1,680,936 $296,216 $1,977,152 $3,516,952 1946802 $5,834,400 $4,980,000 $116,960 $720,000 $5,816,960 $17,440 $176,000 ($158,560) ($63,424) ($95,136) ($0.951) $0.110 $5.576 2680112 $7,035,600 $5,800,000 $120,000 $612,9601 $6,532,960 $502,640 $80,0001 $422,640 $169,056 $253,584 $1.014 $0.220 $7.909 E excess over A F G H 231 232 233 i. Assume that a corporation has $100,000 of taxable income from operations plus $5,000 of interest income and $10,000 234 of dividend income. What is the company's tax liability? 235 236 Operating income = $100,000 237 Interest income = $5,000 238 Dividends = $10,000 239 Taxable dividends= $3,000 240 Taxable Income: $108,000 241 242 Corporate Tax Rates for 2010 243 244 Plus this 245 It pays this percentage 246 amount on the on the 247 If a corporation's taxable base of the 248 income is between: bracket: the base 249 (1) (2) (3) (4) 250 $0 $50,000 $0 15.0% 251 $50,000 $75,000 $7,500 25.0% 252 $75,000 $100,000 $13,750 34.0% 253 $100,000 $335,000 $22,250 39.0% 254 $335,000 $10,000,000 $113,900 34.0% 255 $10,000,000 $15,000,000 $3,400,000 35.0% 256 $15,000,000 $18,333,333 $5,150,000 38.0% 257 $18,333,333 and up $6,416,667 35.0% 258 259 260 Base amount of tax $ 22,250 261 Marginal tax rate in bracket 39.0% 262 Income above base of bracket 8,000 263 Tax on income above base 3,120 264 265 Total tax liability: 266 267 AA B E F G A D H 264 265 Total tax liability: 266 267 268 269 j. Assume that you are in the 25 percent marginal tax bracket and that you have $5,000 to invest. You have narrowed 270 your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a 271 yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the 272 choice between California and ExxonMobil bonds? 273 274 Taxable vs. Tax Exempt bonds 275 276 ExxonMobil bonds at 10% vs. California muni bonds at 7% 277 278 Amount to invest $5,000 279 ExxonMobil Yield 10% 280 California Yield 7% 281 Tax Rate 25.0% 282 283 ExxonMobil = Yield * (Investment) Yield * (Investment) * (Tax Rate) 284 ExxonMobil = 285 286 California = Yield * (Investment) 287 California = 288 289 Tax rate which you would be indifferent 290 291 Solve for T 292 Muni Yield = Corp Yield *(1-Tax rate) 293 Tax Rate = 294 - 0 295 B E F 2013 $6.00 100,000 40% $40,000 2014 $12.17 250,000 40% $40,000 1946802 $7,282 $20,000 $632,160 $1,287,360 $1,946,802 $1,202,950 $263,160 $939,790 $2,886,592 2680112 $14,000 $71,6321 $878,000 $1,716,480 $2,680,112 $1,220,000 $383,160 $836,8401 $3,516,952 A B D 1 Input Data: 2 2012 3 Year-end common stock price $8.50 4 Year-end shares outstanding 100,000 5 Tax rate 40% 6 Lease payments $40,000 7 8 Balance Sheets 9 10 11 Assets 1124000 12 Cash and equivalents $9,000 13 Short-term investments $48,600 14 Accounts receivable $351,200 15 Inventories $715,200 16 Total current assets $1,124,000 17 Gross Fixed Assets $491,000 18 Less Accumulated Dep. $146,200 19 Net Fixed Assets $344,800 20 Total Assets $1,468,800 21 22 Liabilities and equity 23 Accounts payable $145,600 24 Notes payable $200,000 25 Accruals $136,000 26 Total current liabilities $481,600 27 Long-term bonds $323,432 28 Total liabilities $805,032 29 Common stock (100,000 share $460,000 30 Retained earnings $203,768 31 Total common equity $663,768 32 Total liabilities and equity $1,468,800 33 34 Income Statements 35 36 1124000 37 Net sales $3,432,000 38 Costs of Goods Sold Except De $2,864,000 39 Depreciation and amortization $18,900 40 Other Expenses $340,000 41 Total Operating cost $3,222,900 42 Earnings before interest and ta $209,100 43 Less interest $62,500 44 Pre-tax earnings $146,600 45 Taxes (40%) $58,640 46 Net Income before preferred d $87,960 47 EPS $0.880 48 DPS $0.220 49 Book Value Per Share $6.638 50 $324,000! $720,000 $284,960 $1,328,960 $1,000,000 $2,328,960 $460,000 $97,632 $557,632 $2,886,592 $359,800 $300,000 $380,000 $1,039,800 $500,000 $1,539,800 $1,680,936 $296,216 $1,977,152 $3,516,952 1946802 $5,834,400 $4,980,000 $116,960 $720,000 $5,816,960 $17,440 $176,000 ($158,560) ($63,424) ($95,136) ($0.951) $0.110 $5.576 2680112 $7,035,600 $5,800,000 $120,000 $612,9601 $6,532,960 $502,640 $80,0001 $422,640 $169,056 $253,584 $1.014 $0.220 $7.909 E excess over A F G H 231 232 233 i. Assume that a corporation has $100,000 of taxable income from operations plus $5,000 of interest income and $10,000 234 of dividend income. What is the company's tax liability? 235 236 Operating income = $100,000 237 Interest income = $5,000 238 Dividends = $10,000 239 Taxable dividends= $3,000 240 Taxable Income: $108,000 241 242 Corporate Tax Rates for 2010 243 244 Plus this 245 It pays this percentage 246 amount on the on the 247 If a corporation's taxable base of the 248 income is between: bracket: the base 249 (1) (2) (3) (4) 250 $0 $50,000 $0 15.0% 251 $50,000 $75,000 $7,500 25.0% 252 $75,000 $100,000 $13,750 34.0% 253 $100,000 $335,000 $22,250 39.0% 254 $335,000 $10,000,000 $113,900 34.0% 255 $10,000,000 $15,000,000 $3,400,000 35.0% 256 $15,000,000 $18,333,333 $5,150,000 38.0% 257 $18,333,333 and up $6,416,667 35.0% 258 259 260 Base amount of tax $ 22,250 261 Marginal tax rate in bracket 39.0% 262 Income above base of bracket 8,000 263 Tax on income above base 3,120 264 265 Total tax liability: 266 267 AA B E F G A D H 264 265 Total tax liability: 266 267 268 269 j. Assume that you are in the 25 percent marginal tax bracket and that you have $5,000 to invest. You have narrowed 270 your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a 271 yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the 272 choice between California and ExxonMobil bonds? 273 274 Taxable vs. Tax Exempt bonds 275 276 ExxonMobil bonds at 10% vs. California muni bonds at 7% 277 278 Amount to invest $5,000 279 ExxonMobil Yield 10% 280 California Yield 7% 281 Tax Rate 25.0% 282 283 ExxonMobil = Yield * (Investment) Yield * (Investment) * (Tax Rate) 284 ExxonMobil = 285 286 California = Yield * (Investment) 287 California = 288 289 Tax rate which you would be indifferent 290 291 Solve for T 292 Muni Yield = Corp Yield *(1-Tax rate) 293 Tax Rate = 294 - 0 295