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Exam 3: Financial Statements,cash Flow and Taxes

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Question 51

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A company with a 15% tax rate buys preferred stock in another company.The preferred stock has a before-tax yield of 7.50%.Assume a 70% dividend exclusion for tax on dividends.What is the preferred stock's after-tax return? (Round your final answer to two decimal places. )

A) 7.74%
B) 6.95%
C) 7.16%
D) 5.94%
E) 7.09%

F) A) and D)
G) B) and D)

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Question 52

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The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

A) True
B) False

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Question 53

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EBIT,often referred to as operating income,stands for "earnings before interest and taxes."

Last year Almazan Software reported $10.500 million of sales,$6.250 million of operating costs other than depreciation,and $1.300 million of depreciation.The company had $5.000 million of bonds that carry a 6.5% interest rate,and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $0.310 million.By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.(Round your final answer to 3 decimal places. )

Companies typically provide four basic financial statements: the fixed income statement,the current income statement,the balance sheet,and the cash flow statement.

Maureen Smith is a single individual.She claims one exemption of $4,050 for herself and claims a standard deduction of $6,350.Her salary for the year was $146,350.Assume the following tax table is applicable. ? Single Individuals ? $\begin{array}{lccc} & \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \\\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \\\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \\\hline\text { Up to } \$ 9,325 & \$ 0.00 & 10.0 \% & 10.0 \% \\\$ 9,325-\$ 37,950 & 932.50 & 15.0 & 13.8 \\\$ 37,950-\$ 91,900 & 5,226.25 & 25.0 & 20.4 \\\$ 91,900-\$ 191,650 & 18,713.75 & 28.0 & 24.3 \\\$ 191,650-\$ 416,700 & 46,643.75 & 33.0 & 29.0 \\\$ 416,700-\$ 418,400 & 120,910.25 & 35.0 & 29.0 \\\text { Over } \$ 418,400 & 121,505.25 & 39.6 & 39.6\end{array}$ ? What is her federal tax liability? ?

Which of the following statements is CORRECT?

Watson Oil recently reported (in millions) $8,250 of sales,$5,750 of operating costs other than depreciation,and $1,100 of depreciation.The company had $3,200 of outstanding bonds that carry a 5% interest rate,and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate future sales and cash flows,the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital.By how much did the firm's net income exceed its free cash flow? Do not round the intermediate calculations.

The balance sheet represents a snapshot in time,whereas the income statement reports on operations over a period of time.

The value of any asset is the present value of the cash flows the asset is expected to provide.The cash flows a business is able to provide to its investors is its free cash flow.This is the reason that FCF is so important in finance.

Over the years,O'Brien Corporation's stockholders have provided $20,000,000 of capital,when they purchased new issues of stock and allowed management to retain some of the firm's earnings.The firm now has 1,000,000 shares of common stock outstanding,and it sells at a price of $32.00 per share.How much value has O'Brien's management added to stockholder wealth over the years,i.e. ,what is O'Brien's MVA?

The balance sheet measures the flow of funds into and out of various accounts over time,while the income statement measures the firm's financial position at a point in time.

A corporation recently purchased some preferred stock that has a before-tax yield of 6.50%.The company has a tax rate of 38%.What is the after-tax return on the preferred stock? Assume a 70% dividend exclusion for tax on dividends.(Round your final answer to two decimal places. )

Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions ($4,050 for each exemption) .In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $168,100.What is the couple's taxable income? ?

Corporations face the following tax schedule: $\begin{array} { l r r } \text { Taxable Income } & \text { Tax on Base of Bracket } & \text { Percentage on Excess above } \\\text { Up to } \$ 50,000 & \$ 0 & \text { Base } \\\$ 50,000 - \$ 75,000 & 7,500 & 15 \% \\\$ 75,000 - \$ 100,000 & 13,750 & 25 \\\$ 100,000 - \$ 335,000 & 22,250 & 34 \\\$ 335,000 - \$ 10,000,000 & 113,900 & 39 \\\$ 10,000,000 - \$ 15,000,000 & 3,400,000 & 34 \\\text { Over } \$ 15,000,000 - \$ 18,333,333 & 5,150,000 & 35 \\\$ 1333 & 6,416,667 & 35\end{array}$ Company Z has $90,000 of taxable income from its operations,$5,000 of interest income,and $30,000 of dividend income from preferred stock it holds in other corporations.What is Company Z's tax liability? Assume a 70% dividend exclusion for tax on dividends.

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc.(BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate.Prior to the new provision,BBI's net income was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Which of the following statements is CORRECT?

Uniontown Books began operating in 2014.The company lost money its first three years of operations,but has had an operating profit during the past two years.The company's operating income (EBIT) for its first five years was as follows: $\begin{array} { r r } \text { Year } & \text { EBIT } \\2014 & - \$ 1,600,000 \\2015 & - \$ 2,000,000 \\2016 & - \$ 1,000,000 \\2017 & \$ 1,200,000 \\2018 & \$ 7,000,000\end{array}$ ? The company has no debt,and therefore,pays no interest expense.Its corporate tax rate has remained at 34% during this 5-year period.What was Uniontown's tax liability for 2018? (Assume that the company has taken full advantage of the carry-back and carry-forward provisions,and assume that the current provisions were applicable in 2014. )

Emery Mining Inc.recently reported $125,000 of sales,$75,500 of operating costs other than depreciation,and $10,200 of depreciation.The company had $16,500 of outstanding bonds that carry a 7.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes.(Round your intermediate and final answers to two decimal places. )

Salinger Software was founded in 2015.The company lost money each of its first three years,but was able to turn a profit in 2018.Salinger's operating income (EBIT) for its first four years of operations is reported below. $\begin{array} { r r } \text { Year } & \text { EBIT } \\2015 & - \$ 100,000,000 \\2016 & - \$ 150,000,000 \\2017 & - \$ 100,000,000 \\2018 & \$ 700,000,000\end{array}$ ? 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 2015.How much tax did the company pay in 2018?