Tax Drill - Tax on Jeopardizing InvestmentsRaja is the CEO of R and R, Inc., a private foundation. Raja invests $300,000 (75%) of the foundation's investment portfolio in derivatives.Previously, the $300,000 had been invested in corporate bonds with an AA rating that earned 2% annually. If the derivatives investmentworks as Raja's investment adviser claims, the annual earnings could be as high as 15%. Considering the tax on jeopardizing investments,complete the following sentences.The initial tax imposed on R and R is $30,000and the initial tax imposed on Raja is $imposition of the tax is not addressed within the correction period, the additional tax for R and R would be $additional tax for Raja would be $If the act causing the75,000 and the

Private foundations are prohibited from making investments that would jeopardize the foundation's…

Answered: Tax Drill - Tax on Jeopardizing…

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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Question 31, P1-11 (book/static) > Part 1 of 4 Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate tax consequences of such a decision. Currently, Hemingway generates before-tax yearly income of $208,000 and has no debt outstanding. Expanding operations would allow Hemingway to increase before-tax yearly income to $340,000. Hemingway can use either cash reserves or debt to finance its expansion. If Hemingway uses debt, it will have a yearly interest expense of $71,000. Create a spreadsheet to conduct a tax analysis (assume a 21% flat tax rate) for Hemingway Corporation and determine the following: a. What is Hemingway's current annual corporate tax liability? b. If Hemingway finances its expansion using cash reserves, what will be its new corporate tax liability? c. If Hemingway finances its expansion using debt, what will be its new corporate tax liability? d. What would you…
Income Tax. Deferred Tax Liability and Deferred Tax Asset (PAS 12) Problem 11. The 2015 income statement of Rob Inc. reported a financial income of P3,000,000. The tax accountant and tax auditor have found the following items included in such amount: Capital gain from the sale of a land classified as capital asset Illegal contribution to political parties and candidates Interest income from a 6-year time deposit Representation expenses in excess of the amount allowed by NIRC 400,000 P300,000 200,000 500,000 Based on the analysis conducted by the accountant and tax auditor, they also found out the following differences in tax and accounting treatments: • Unearned revenue of P200,000 was recorded by Rob Inc. in its accounting books but was reported as income in the corporate income tax return. • Installment sales of P300,000 was recorded by Rob Inc. in its accounting books but was only collected on year 2016. • Provision for lawsuit for P400,000 was recognized by Rob Inc. in its…
Adjusted WACC. Lewis runs an outdoor adventure company and wants to know what effect a tax change will have on his company's WACC. Currently, Lewis has the following financing pattern: Equity: 36% and cost of 18.17% Preferred stock: 15% and cost of 11.88% Debt: 49% and cost of 10.8% before taxes What is the adjusted WACC for Lewis if the tax rate is a. 40%? b. 25%? с. 20%? d. 10%? е. 0%? ..... a. What is the adjusted WACC for Lewis if the tax rate is 40%? |% (Round to two decimal places.)
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to Equity Ratio (D/S) 0.00 0.1111 0.2500 0.4286 0.6667 Market Equity-to- Value Ratio (ws) 1.0 0.90 6.0% 6.4 0.80 7.0 8.2 0.70 0.60 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 8%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two…
Novak Company would like to start a new venture. The company is currently in the 24% marginal tax bracket and uses a 4% discount factor. The company projects that the venture will produce before-tax cash flows of $9,000 in Year 0, $20,000 in Year 1, and $33,000 in Year 2. (a) If taxable income and the before-tax cash flows are equal in the year received, compute the present value of the cash flows. (Round present value factor calculations to 3 decimal places, e.g. 1.251 and final answer to O decimal places, e.g. 58,971.) Present value
Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task: The firm’s marginal tax rate is 40%. The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue. Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury bonds is 7%, and the market risk…
8. M&M and Miller models After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes. Complete the following sentence based on your understanding of the MM Model with corporate taxes: MM's model that included the existence of corporate taxes concluded that 100% Alumiscape Corporation has no debt, and a value of $40.000 million. Metallica Metals is otherwise identical but has $16.000 million of debt in its capital structure. Under the different models, what is the value of Metallica Metals if its corporate tax rate is 30%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 28%? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Is the preceding information correct?…
MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 12%. a. What value would MM now estimate for each firm? (Hint: Use Proposition 1.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places. Company U: $ Company L: $ million million b. What is rs for Firm U? Round your answer to one decimal place. % What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place. % c. Find SL, and then show that SL + DV₁ results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round…
In-Class Example : MM Proposition I without Corporate Taxes Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 18,000 shares of stock outstanding, currently worth $35 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $85,000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest and tax of $93,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year, and no market frictions exist (perfect capital markets). What is the value of Alpha Corporation? What is the value of Beta Corporation? What is the market value of Beta Corporation’s equity? How much will it cost to purchase 20 percent of each firm’s equity? Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year?…
Please answer with reason for all why the option is correct and why the other options are incorrectPlease answer correct otherwise skip it There are two potential investments being considered by John Deere. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 20%. Which of the following statements is true regarding Deere's choice? Group of answer choices a) If the second investment generates $7,000 of before-tax income, Casey should choose the second investment. b) Both, if the second investment generates $5,800 of before-tax income, Casey should choose the first investment and if the second investment generates $7,000 of before-tax income, Casey should choose the second investment are true. c) Casey should always choose the first investment because it minimizes tax costs. d) If the second investment generates $5,800 of before-tax income, Casey should choose the first investment.
The treasurer of Kelly Bottling Company (a corporation) currently has $100,000 invested in preferred stock yielding 8 percent. He appreciates the tax advantages of preferred stock and is considering buying $100,000 more with borrowed funds. The cost of the borrowed funds is 10 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 2 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 34 percent tax bracket, with dividends taxed at 15 percent.a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
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%

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