Corporate Income Tax and Real Interest Rates Study ...



Corporate Income Tax and Real Interest Rates Study Problems 1-2 (page 26) and 2-2 (page 58) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis.

Problem 1.1 1-1 Corporate income tax) . The William B. Waugh Corporation is a regional Toyota dealer. The firm sells new used trucks are actively involved in the parts business. During the most recent year the company generated sales of $3 million. The combined cost of goods sold and the operating expenses were 2.1 million. Also, $400,000.00 in interest expenses was paid during the year. The firm received $6,000.00 during the year in dividend income from 1,000 shares of common stock that had been purchased 3 years previously. However, the stock was sold toward the end of the year for $100.00 per share; its initial cost was $80.00 per share. The company also sold land that had been recently purchased and had been held for only 4 months. The selling price was $50,000.00, the cost was $45,000.00. Calculate the corporation’s tax liability.

William B. Waugh Corporation—Corporate Income Tax

Sales $3,000,000

Cost of Goods Sold + Operating Expenses (2,100,000)

Operating Profits $900,000

Dividend Income $6,000

Less 70% Exclusion (4,200) 1,800

Interest Expense (400,000)

S-T Capital Gain

Selling Price $50,000

Cost (45,000) 5,000

L-T Capital Gain

Selling Price

(#Shares)(Price/Share)

1000 x $100.00 $100,000

Cost

(#Shares)(Price/Share)

1000 x $80.00 (80,000) 20,000

Taxable Ordinary Income $526,800

$50,000 x .15 = $7,500

25,000 x .25 = 6,250

451,800 x .34 = 153,612

$526,800

Surtax:

$235,000 x .05 = 11,750

Total taxes due = $179,112

Problem 1-2 1.2. (Corporate Income Tax). Sales for L. B. Menielle Inc. during the past year amounted to $5 million. The firm provides parts and supplies for oil field services companies. Gross profit for the year was $3 million. Operating expenses totaled $1 million. The interest and dividend income from the securities it owned were $20,000.00 and $25,000.00, respectively. The firm’s interest expenses were $100,000.00. The firm sold securities on two occasions during the year, receiving a gain of $40,000.00 on the first sale but loosing $50,000.00 on the second. The stock sold first had been owned for 4 years, the stock sold second had been purchased 3 months before the sale. Compute the corporation’s tax liability.

L. B. Menielle, Inc.—Corporate Income Tax

Sales $5,000,000

Cost of Goods Sold (2,000,000)

Gross Profits $3,000,000

Operating Expenses (1,000,000)

Operating Profits $2,000,000

Interest Income 20,000

Dividend Income $25,000

Less 70% Exclusion (17,500) 7,500

Interest Expense (100,000)

Taxable Ordinary Income $1,927,500

Capital Gains and Losses

Long-Term Gain (Loss) $40,000

Short-Term Gain (Loss) (50,000)

Net Short-Term Gain (Loss) ($10,000)

Tax Liability:

$50,000 x 0.15 = $7,500

25,000 x 0.25 = 6,250

25,000 x 0.34 = 8,500

235,000 x 0.39 = 91,650

1,592,500 x 0.34 = 541,450

$1,927,500 $655,350

The $10,000 net short-term capital loss may not be deducted from ordinary income. However, if net capital gains were realized in the previous three years, the loss may be carried back to offset those prior gains, which would reduce the corporation’s tax liability in the present year. If gains did not exist in prior years, the loss could be carried forward for five years.

Cash Flow and Ratio Analysis Study Problems 3-2 (page 85) and 4-2 (page 122) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome.

3.2 (Computing cash flow). Given the following information, compute the firm’s free cash flows and financing cash flows: Increase in current assets $ 50 Operating income 75 Interest expenses 25 Increase in account payables 35 Dividends 15 Increase in common stock 20 Increase in net fixed taxes 23 Depreciation expenses 12 Income taxes 17

Free Cash Flows

|Operating income | |$75 |

|Depreciation expense | |12 |

|Income taxes | |(17) |

|After-tax cash flows from operations | |70 |

|Increase in current assets |(50) | |

|Increase in current liabilities |35 | |

|Increase in networking capital. | |(15) |

|Change in gross fixed assets* | |(35) |

| Firm’s Free Cash Flows | |$20 |

* The change in gross fixed assets is equal to the change in net fixed assets ($23) plus the depreciation expense for the year of $12, resulting in a change in gross fixed assets of $35.

Financing Cash Flows:

|Interest expense | |($25) |

|Increase in common stock | |20 |

|Dividend | |(15) |

|Financing Cash Flows | |($20) |

4.2 (Ratio Analysis). The Allen Corporation had sales in 2008 of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the companies’ debt is 6% and its tax rate is 30% . The operating profit margin was 12 percent. What was the 2008 operating income and net income?. What was operating returned on assets and returned on equity? Assume the interest must be paid on all of the debt.

Operating Income = .12 X $65,000,000 = 7,800,000

Net Income:

Operating Income 7,800,000

Minus: Interest expense - (.06 X 20,000,000) = 1,200,000

Taxes: - [.3 X (7,800,000 –1,200,000)] = 2,000,000

Net Income 4,600,000

[pic] = [pic] = .19 or 19%

[pic] = [pic] = .21 or 20%

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