Problem 23-21 (LO. 5, 8)Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation's investment portfolio in high-riskderivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivativesinvestment works as Otis's investment adviser claims, the annual earnings could be as high as 20%.a. Considering the tax on jeopardizing investments, who, if anyone, is subject to the tax?Both Rectify and Otisb. Compute the amount of the initial tax, if any.The initial tax imposed on Rectify (if any) is $The initial tax imposed on Otis (if any) is $Yes1,112 X.c. If the act causing the imposition of the tax is not addressed within the correction period, compute the additional tax, if any.The additional tax for Rectify (if any) would be $The additional tax for Otis (if any) would be $10because the additional taxX.00d. Are Otis and the foundation better off financially if the prohibited transaction, if any, is addressed within the correction period?X.x.only applies if the correction is not made within the statutory period✓.

Levy of taxes on private foundations: There are numerous taxes owed by the private foundation. Taxes…

Answered: Otis is the CEO of Rectify, Inc., a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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McConn Manufacturing is currently all-equity financed, has an EBIT of $2 million, and has a corporate tax rate of 21 percent. Natalie, the company’s founder, is the lone shareholder. All earnings are paid out as dividends to Natalie. If the firm were to convert $4 million of equity into debt, the cost would be 10 percent and Natalie would hold all the debt. Assume Natalie pays personal taxes on interest income at a rate of 37 percent but pays taxes on dividends at a rate of 20 percent. Calculate the total cash flow to Natalie after she pays personal taxes if the firm is unlevered and if it is levered
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Particulate plc is an all-equity-financed business with a market value of £35 million and a cost of capital (after tax) of 20 per cent p.a. The business intends to purchase and cancel £8 million of equity finance using the cash raised from issuing 10 per cent irredeemable loan notes. The rate of corporation tax is 30 per cent. Assuming that the assumptions of Modigliani and Miller (in a world with taxes) are correct, how will the capital restructuring affect: (a) The market value of Particulate plc; (b) Its cost of equity; and (c) Its weighted average cost of capital?
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Kk422.
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Explain well with proper step by step and type the answer.

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