ASSIGNMENT
1. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
A. True
B. False
2. On the balance sheet, total equity must always equal the sum of total assets and total liabilities.
A. True
B. False
3. Interest paid by a corporation is a deductible operating expense, hence it decrease the firm's taxes.
A. True
B. False
4. Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are not the same.
A. True
B. False
5. Which of the following statements is CORRECT?
A. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
B. The income statement sheet gives us a picture of the firm's financial position at a point in time.
C. The balance sheet gives us a picture of the firm's financial position at a point in time.
D. The statement of cash flows tells us how much cash the firm must pay out in interest during the year.
E. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
6. Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?
A. The company repurchases common stock.
B. The company pays a dividend.
C. The company issues new common stock.
D. The company gives customers more time to pay their bills.
E. The company purchases a new piece of equipment.
7. Which of the following items is NOT normally considered to be a current asset?
A. Accounts receivable.
B. Inventory.
C. Cash.
D. Bonds.
E. Short-term, highly-liquid, marketable securities.
8. Which of the following statements is most correct?
A. Individuals are allowed to exclude 70% of their dividend income from their taxes.
B. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
C. Corporations are allowed to exclude 70% of their interest income from corporate taxes.
D. Individuals pay taxes on only 30% of the income realized from municipal bonds.
E. Individuals are allowed to exclude 70% of their interest income from their taxes.
9. A loss incurred by a corporation
A. Must be carried forward unless the company has had 2 loss years in a row.
B. Can be carried back 2 years, then carried forward up to 20 years following the loss.
C. Can be carried back 5 years and forward 3 years.
D. Cannot be used to reduce taxes in other years except with special permission from the IRS.
E. None of the above.
10. Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?
Sales $2,250
Costs 1,400
Depreciation 250
EBIT 600
Interest expense 70
EBT 530
Taxes (40%) 212
Net income 318
A. $325
B. $342
C. $360
D. $378
E. $397
11. Your corporation has the following cash flows:
Operating income $350,000
Interest Income 10,000
Interest Paid 45,000
Dividend Received 20,000
Dividend Paid 50,000
If the applicable income tax rate is 40% (federal and state combined), and if 70% of dividends received are exempt from taxes, what is the corporation's tax liability?
A. $ 83,980
B. $ 88,400
C, $ 92,820
D. $ 97,461
E. $192,600
12. Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 9.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?
A. 7.02%
B. 7.39%
C. 7.76%
D. 8.27%
E. 8.56%
13. Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?
A. 6.57%
B. 6.92%
C. 7.28%
D. 7.64%
E. 8.03%
14. Appalachian Airlines began operating in 2012. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT) for its first five years is listed below. Each year the company's corporate tax rate has been 40%.
Year Taxable Income
2012 -$4,500,000
2013 $1,000,000
2014 $2,000,000
2015 $3,000,000
2016 $5,000,000
Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2012. How much did the company pay in taxes in 2015?
A. $ 600,000
B. $ 765,000
C. $ 800,000
D. $ 930,000
E. $1,023,000
15. A corporation recently purchased some preferred stock that has a before-tax yield of 7.5%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?
A. 5.32%
B. 5.60%
C. 5.89%
D. 6.20%
E. 6.65%
16. A 5-year corporate bond yields 10%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?
A. 27.78%
B. 29.17%
C. 30.63%
D. 32.16%
E. 35.00%
17. Salinger Software was founded in 2010. The company lost money each of its first three years, but was able to turn a profit in 2013. Salinger's operating income (EBIT) for its first four years of operations is reported below.
Year EBIT
2010 -$ 50,000,000
2011 -$150,000,000
2012 -$100,000,000
2013 $700,000,000
The company has no debt, so operating income equals earnings before taxes. The corporate tax rate has remained constant at 35%. Assume that the company took full advantage of the carry-back, carry-forward provisions in the Tax Code, and assume that the current provisions were applicable in 2010. How much tax did the company pay in 2013?
A. $114,030,875
B. $120,032,500
C. $126,350,000
D. $133,000,000
E. $140,000,000
18. Moose Industries faces the following tax schedule:
|
Taxable
|
Tax on Base
|
Percentage on
|
|
Income
|
of Bracket
|
Excess above Base
|
|
Up to $50,000
|
$ 0
|
15%
|
|
$5o,000-$75,000
|
7,500
|
25
|
|
$75,000-Mo,000
|
13,750
|
34
|
|
$no,00o-$335,0oo
|
22,250
|
39
|
|
$335,000-$10,000,000
|
113,900
|
34
|
|
$10,000,000-$15,000,000
|
3,400,000
|
35
|
|
$15,000m0-$3.8,333,333
|
5,150,000
|
38
|
|
Over $3.8,333,333
|
6,416,667
|
35
|
Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the company's net income for the year?
A. $4,809,874
B. $5,063,025
C. $5,329,500
D. $5,610,000
E. $5,890,500
19. Which of the statement(s) is correct?
i. Corporations rarely pay tax on the interest income.
ii. Higher tax bracket people tend to buy municipal bond because it is federal tax exempt.
iii. Short term capital gain and long term capital gain are treated the same way.
iv. The corporate tax rates in the U.S. is one of the lowest among the developed nations.
A. i only
B. ii only
C. ii and iv
D. iii and iv
E. All the statements are correct
20. What is your corporation's tax liability if it has the following cash flows, assuming a marginal tax rate of 35% on all income? (Note: No need to use Tax Table for this problem, but simply assume a tax rate of 35%)
|
Operating Income
|
$250,000
|
|
Interest Received (Income)
|
$22,000
|
|
Interest Paid (Expense)
|
$55,000
|
|
Dividend Received (Income)
|
$80,000
|
|
Dividend Paid
|
$35,000
|
A. $84,350
B. $96,400
C. $98,640
D. $104,800
E. None of the above
21. An important difference between interest paid by a corporation and dividends paid for a corporation is that:
A. Interest paid is tax-deductible, while dividends paid are not.
B. Dividends paid are tax-deductible, while interest paid is not.
C. Long-term interest is tax-deductible, while dividends paid and short-term interest paid are not.
D. Corporations rarely pay dividends, while they frequently pay interest.
E. None of the above.
22. The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns is known as __________.
A. progressive tax system
B. average tax rate
C. earnings before tax
D. marginal tax rate
E. propensity to save
23. An increase in a firm's assets results in ___________________.
A. pay dividends
B. decrease accounts payable
C. repurchase of common stock
D. decreased fixed assets
E. increase in inventory
24. In general, as you read down the left hand side of a balance sheet, which of the following changes do you observe?
A. The assets are more fully depreciated.
B. The assets are growing in value.
C. The assets are increasing in maturity.
D. The assets are becoming less liquid.
E. More and more amortized
25. Which of the following items does not appear under current liabilities in the balance sheet?
A. Marketable securities
B. Accounts payable
C. Notes payable
D. A and B
E. B and C
26. A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?
A. 13.85%
B. 12.31%
C. 11.43%
D. Cannot be computed without additional information
E. None of the above
27. Mountain Air began operating in 2005. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT) for its first five years is listed below. Each year the company's corporate tax rate has been 35%.
|
Year
|
Taxable Income
|
|
2009
|
-$9,000,000
|
|
2010
|
$1,000,000
|
|
2011
|
$3,000,000
|
|
2012
|
$4,000,000
|
|
2013
|
$3,000,000
|
Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2009. How much did the company pay in taxes in 2013?
A. $0
B. 350,000
C. 700,000
D. 1,400,000
E. None of the above
28. Jewel is a single and has the following situation for the year: Jewel's income of $90,000; dividend income of $18,500; interest income of $6,200; short-term capital gain of $9,200 and long term capital gain of 13,700. She also paid $9,700 on interest charges on her credit card. Her other total exemptions and itemized deductions is 21,200; these amounts will be deducted from her gross income to determine her taxable income. If she is files as a single individual, what is Jewel's tax liability for the year, i.e. how much in taxes she will pay for the year? Use the individual tax rate provided below.
|
Individual Tax Rates: Single Individual
|
|
Taxable Income
|
You Pay This Amount on the Base of the Bracket
|
Plus This Percentage on the Excess over the Base (Marginal Rate)
|
Average Tax Rate at the Top of Bracket
|
|
Up to $8925
|
$0
|
10.0%
|
10.0%
|
|
$8925 - 36350
|
$892.50
|
15.0
|
13.8
|
|
$36250 - 87850
|
$4991.25
|
25.0
|
20.4
|
|
$87850 - 183250
|
$17891.25
|
28.0
|
24.3
|
|
183250 - 398350
|
$44603.25
|
33.0
|
29.0
|
|
$398350 - 400000
|
$115586.25
|
35.0
|
29.0
|
|
Over $400000
|
$116163.75
|
39.6
|
39.6
|
A. $22,984.25
B. $20,268.25
C. $24,104.25
D. $21,489.25
E. None of the above
29. Jewel is a single and has the following situation for the year: Jewel's income of $90,000; dividend income of $18,500; interest income of $6,200; short-term capital gain of $9,200 and long term capital gain of 13,700. She also paid $9,700 on interest charges on her credit card. Her other total exemptions and itemized deductions is 21,200; these amounts will be deducted from her gross income to determine her taxable income. If she is files as a single individual, what is Jewel's marginal tax rate? Use the individual tax rate provided below.
|
Individual Tax Rates: Single Individual
|
|
Taxable Income
|
You Pay This Amount on the Base of the Bracket
|
Plus This Percentage on the Excess over the Base (Marginal Rate)
|
Average Tax Rate at the Top of Bracket
|
|
Up to $8925
|
$0
|
10.0%
|
10.0%
|
|
$8925 - 36350
|
$892.50
|
15.0
|
13.8
|
|
$36250 - 87850
|
$4991.25
|
25.0
|
20.4
|
|
$87850 - 183250
|
$17891.25
|
28.0
|
24.3
|
|
183250 - 398350
|
$44603.25
|
33.0
|
29.0
|
|
$398350 - 400000
|
$115586.25
|
35.0
|
29.0
|
|
Over $400000
|
$116163.75
|
39.6
|
39.6
|
A. 10.0%
B. 15.0%
C. 28.0%
D. 33.0%
E. None of the above
30. Jewel is a single and has the following situation for the year: Jewel's income of $90,000; dividend income of $18,500; interest income of $6,200; short-term capital gain of $9,200 and long term capital gain of 13,700. She also paid $9,700 on interest charges on her credit card. Her other total exemptions and itemized deductions is 21,200; these amounts will be deducted from her gross income to determine her taxable income. If she is files as a single individual, what is Jewel's average tax rate? Use the individual tax rate provided below.
|
Individual Tax Rates: Single Individual
|
|
Taxable Income
|
You Pay This Amount on the Base of the Bracket
|
Plus This Percentage on the Excess over the Base (Marginal Rate)
|
Average Tax Rate at the Top of Bracket
|
|
Up to $8925
|
$0
|
10.0%
|
10.0%
|
|
$8925 - 36350
|
$892.50
|
15.0
|
13.8
|
|
$36250 - 87850
|
$4991.25
|
25.0
|
20.4
|
|
$87850 - 183250
|
$17891.25
|
28.0
|
24.3
|
|
183250 - 398350
|
$44603.25
|
33.0
|
29.0
|
|
$398350 - 400000
|
$115586.25
|
35.0
|
29.0
|
|
Over $400000
|
$116163.75
|
39.6
|
39.6
|
A. 20.71%
B. 21.03%
C. 19.23%
D. 20.45%
E. None of the above