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
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or b)distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required:b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.
Slush Corporation has two bonds outstanding, each with a face value of $3.4 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.14 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
Slush Corporation has two bonds outstanding, each with a face value of $3.6 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.16 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
Safeco Inc. has no debt, and maintains a policy of holding $12 million in excess cash reserves, invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of 21%, what is the cost of permanently maintaining this $12 million reserve? (Hint: What is the present value of the additional taxes that Safeco will pay?)
James is a skiing company in the Isle of man. It has 80 million shares outstanding with a market price of £32 per share and no debt. James has had consistently stable earnings and pays a 25% tax rate. Management plans to borrow €1 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Disregard any costs of financial distress for this question, i.e., you can consider they are always zero. 1. What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value before the announcement of the recapitalization? 2.What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the announcement of the recapitalization, but before the company issues debt? 3.What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after…
Cooley Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between MCI bonds which yield 10 percent, state of Colorado municipal bonds which yield 7 percent, and MCI preferred stock with a dividend yield of 8 percent. Cooley's corporate tax rate is 40 percent, and 70 percent of its dividends received are tax exempt. What is the after-tax rate of return on the highest yielding security? A. a. 7.04% B. b. 7.0% C. c. 8.43% D. d. 6.9% E. e. 6.0%
Slush Corporation has two bonds outstanding, each with a face value of $2.3 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.03 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
Kk422.
Derby Bank has total assets of $350 million, and the risky portion of the assets consist of $100 million of home mortgages and $200 million of commercial loans. The bank has an allowance for loan & lease losses or ALL of 3 million, subordinated debt of $5 million, preferred stock of $5 million, and common stock of $25 million. Under the new or curent U.S. Prompt Corrective Action (PCA) rules what class of capitalization does this bank possess? Also, what is the ratio of total capital (tier1 + tier 2) to risk weighted assets (RWA). A. Well capitalized; total capital ratio of 14.0% B. Adequately capitalized; total capital ratio of 10.8% C . Well capitalized; total capital ratio of 15.2% D. Well capitalized; total capital ratio of 12.0% E. Adequately capitalized; total capital ratio of 12.0%
Explain well with proper step by step and type the answer.
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…

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