# Chapter 2 Essays

1273 Words Feb 20th, 2015 6 Pages
Ryan Jobe
Chapter 2
Problems 1-11

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)
Or 5.76%

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
reported \$70 million of net income and \$900 million of retained earnings. The previous retained earnings were \$855 million. How much in dividends did the firm pay to shareholders during the year?

Dividend paid = Beginning retained earnings + Net income of current year – Ending retained earnings
=\$855,000,000 + \$70,000,000 - \$900,000,000
= \$25,000,000

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)
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

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