Managerial Finance

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Chapter 2 Problems

2-1) An investor recently purchased a corporate bond that yields 9%. The investor is in the

36% combined federal and state tax bracket. What is the bond’s after-tax yield?

2-2) Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?

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. What are the firm’s income tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?

2-9) The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is

choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

2-13) The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2013 the firm incurred a loss of $650,000. The firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations.

1. Prepare an ending 1998 Income Statement and Balance Sheet from the following information:  Sales $800,000; Cost of Goods Sold $300,000; Accounts Receivables $20,000; Bonds Outstanding $160,000; Accounts Payable $20,000; Advertising Expense $1,000; Administrative Expenses $35,000; Interest Expense $24,000; Depreciation Expense $40,000; Dividends Paid $137,000; Rent Expense $5,000; Accruals $20,000; Common Stock $100,000; Retained Earnings $245,000 (Beginning 0f 1998); Cash $20,000; Inventory $45,000; Net Fixed Assets $600,000 (Beginning of 1998).  (Assume a 40% Tax Rate)

 

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