Managerial Finance

2.1

Assume that Provident Health System, a for-profit hospital, has $1 million in taxable income for 2016, and its tax rate is 30 percent.

a. Given this information, what is the firms net income? (Net income is what remains after taxes have been paid.)

b. Suppose the hospital pays out $300,000 in dividends. A shareholder, Carl Wu, receives $10,000. If Carls tax rate on dividends is 15 percent, what is his aftertax dividend?

2.2

A firm that owns the stock of another corporation does not have to pay taxes on the entire amount of dividends received. In general, only 30 percent of the dividends received by one corporation from another are taxable. The purpose of this tax law feature is to mitigate the effect of triple taxation, which occurs when earnings are first taxed at the first firm, its dividends paid to the second firm are taxed again, and the dividends paid to shareholders by the second firm are taxed yet again. Assume that a firm with a 21 percent tax rate receives $100,000 in dividends from another corporation. What taxes must be paid on this dividend, and what is the after-tax amount of the dividend?

2.3 Theresa Davis is in the 40 percent personal tax bracket. She is considering investing in HCA (taxable) bonds that carry a 12 percent interest rate.

a. What is her after-tax yield (interest rate) on the bonds?

b. Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds that have an interest rate of 6 percent. With all else the same, should Theresa buy the HCA or the Twin Cities bonds?

c. With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make these bonds and the HCA bonds equally advantageous?

2.4 Aditi Patel currently holds tax-exempt bonds of Good Samaritan Healthcare that pay 7 percent interest. She is in the 40 percent tax bracket. Her broker wants her to buy some Beverly Enterprises taxable bonds that will be issued next week. With all else the same, what rate must be set on the Beverly bonds to make Aditi interested in making a switch?

2.5 George and Margaret Wealthy are in the 48 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, the CEO of Community General Hospital, has been aggressively pursuing a contribution from them of $500,000 to the hospitals soon-to-be-built Cancer Care Center. Without the contribution, the Wealthys taxable income for 2016 would be $2 million. What impact would the contribution have on the Wealthys 2016 tax bill?