Chapter 2 Essays
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?
Corporate Bond yield is 9%
The after tax yield is the return after taxes are deducted.
Therefore the bonds after tax yield = 9% (1-T) = 9% (1-.36)
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? You want the rate that equals the municipal tax exempt yield to the corporate after tax yield. 8% (1-T) = after tax corporate yield 6% = municipal tax exempt yield …show more content…
Dividend paid = Beginning retained earnings + Net income of current year – Ending retained earnings
=$855,000,000 + $70,000,000 - $900,000,000
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?
Income after operating cost: $365,000.00
Less: Interest Expense: ($50,000.00)
Plus: Taxable Dividends Received $4,500.00
Only 30% of the $15,000 in dividends Are taxable
Taxable Income: $319,500
Tax Liability = Base Amount + marginal rate (Difference between taxable income – lower base)
Tax Liability = $22,250.00 + .39 ($319,500 - $100,000)
Tax Liability = $22,250 + .39 ($219,500)
Tax Liability = $22,250 + $85,605
Tax Liability = $107,855
Talley’s Marginal tax rate: 39%
Talley’s average tax rate: Tax Liability/ Amount of Income Subject to Tax
Average Tax Rate = $107,855 / $319,500 = 33.76%
8. The Wendt Corporation had $10.5 million of taxable income. a. What is the company’s federal income tax