Bracket Tax Rate $0 - $10,000 15% $10,000 - $50,000 25% $50,000 - $250,000 30% over $250,000 35%

Compute the average tax rate for the following taxable income amounts. Round the answers to 2 decimal places. a. $39,000 b. $70,000 c. $370,000 d. $1,000,000

Inky Inc. reported the following financial information in 2015.

Operating income (EBIT)	$600,000
Interest	$430,000
Dividends from Printers Inc. not included in operating
income (Inky owns 4% of Printers)	$ 10,000
Dividends paid to Inky's stockholders	$ 20,000

Corporate Income Tax Schedule
Income ($)	Rate (%)
0 - 50,000	15
50,000 - 75,000	25
75,000 - 100,000	34
100,000 - 335,000	39
335,000 - 10,000,000	34
10,000,000 - 15,000,000	35
15,000,000 - 18,333,333	38
Over 18,333,333	35

See the table below for the percentage exepmtions of dividends paid by corporations.

Ownership	Exemption
<20%	70%
20%-80%	80%
>80	100%

1. What is Inky's tax liability? Round the answer to the nearest dollar.

   $

2. What is Inky's marginal tax rate?

   %

3. What is Inky's average tax rate? Round the answer to 1 decimal place.

   %

4. Explain why only one of the rates in b and c is relevant for financial decisions. Select the correct answer below.
   1. The marginal tax rate is relevant in financial decisions involving incremental income because such income is generally taxed at that rate.
   2. The average tax rate is relevant in financial decisions involving incremental income because its calculation includes dividends to stockholders.
   3. The marginal tax rate is relevant in financial decisions involving incremental income because it helps to avoid double taxation of earnings.
   4. The average tax rate is relevant in financial decisions involving incremental income because it is based on a more efficient progressive tax system as opposed to the marginal tax rate.

The Digital Systems Company was organized two years ago to take advantage of an Internet opportunity. Investors paid $12 a share for 2 million shares with a $4 par value. In the next two years, the company had earnings of $2 million and $3 million, respectively. It paid dividends of $1.2 million and $1.3 million, respectively, in those years. At the end of the first year, Digital sold another 500,000 shares of stock at $15.25 per share. Construct the equity section of Digital's balance sheet initially and at the end of its first and second years in business. An answer of $1.2 million should be entered as 1,200,000.

Initially
	Common stock	$
	Paid in Excess	$
	Total Equity	$
At The End Of The First Year
	Common stock	$
	Paid in Excess	$
	Retained Earnings	$
	Total Equity	$
At The End Of The Second Year
	Common stock	$
	Paid in Excess	$
	Retained Earnings	$
	Total Equity	$