Corporate Finance Homework Solutions Chapter 2

P2-4During the year just ended, Shering Distributors, Inc., had pretax earnings from operations of $490,000. In addition, during the year it received $20,000 in income from the interest on bonds it held in Zig Manufacturing and received $20,000 in income from dividends on its 5% common stock holding in Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a 70% dividend exclusion on its Tank Industries stock. A. Calculate the firm’s tax on it operating earnings only.B. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds.C. Find the tax and the after- tax amount attributable to the dividend income from tank industries inc, common stock.D. Compare, contrast and discuss the after tax amt resulting from the interest income and dividend income calculated in parts A and B.E-What is the firm’s total liability for the year? A) 490,000* .40= 196000B) 20,000* .40= 8000 20,000-8,000= 12,000C) 20,000* (1-.7)= 6,000 6000 * .40= 2,400 20,000-2,400= 17,600D) The tax amount after taxes for interest received is lower than the tax amount after taxes for the dividends received because of the tax exclusion on the dividend. This leaves you with more after tax profit for the dividends rather than the after tax profit for the interest. E) Total tax liability= 196,000+ 8000+2400)= 206,400
P2-5Michaels Corporation expects earnings before interest and taxes to be $50,000 for the current period. Assuming an ordinary tax rate of 35%, computer the firm’s earnings after taxes and earnings available for common stockholders (earnings after taxes and preferred stock dividends, if any) under the following conditions:a) The firm pays $12,000 in interest.b) The firm pays $12,000 in preferred stock dividends. EBIT= 50000T= 35%a) 12000 in interest b) 12000 in dividendsEBIT= 50000 50000- iexp (12000) (0)=EBT 38000 50000-T (13300) (17500)=NI 24,700 32500-PD 0 (12000)=ETC 24700 20,500

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