After completing its capital spending for the year, Carlson Manufacturing has $1,300 ofextra cash. The company's managers must choose between investing the cash inTreasury bonds that yield 2.3 percent or paying the cash out to investors who wouldinvest in the bonds themselves.a. If the corporate tax rate is 23 percent, what personal tax rate would make theinvestors equally willing to receive the dividend or to let the company invest themoney? (Do not round intermediate calculations and enter your answer as apercent rounded to the nearest whole number, e.g., 32.)Personal tax rate%b. Is the answer to (a) reasonable?O YesO Noc. Suppose the only investment choice is a preferred stock that yields 4.5 percentcorporate dividend exclusion of 50 percent applies. What personal tax rate willOL< Prevho▶11 b. Is the answer to (a) reasonable?O YesO Noc. Suppose the only investment choice is a preferred stock that yields 4.5 percent. Thecorporate dividend exclusion of 50 percent applies. What personal tax rate will makethe stockholders indifferent to the outcome of the company's dividend decision? (Donot round intermediate calculations and enter your answer as a percent rounded to2 decimal places, e.g., 32.16.)Personal tax rate%d. Is this a compelling argument for a low dividend payout ratio?O YesO NoaSaved3

Solution: a. Suppose tax rate = X% After tax dividend = 1300(1-x%) Now investment in…

Answered: ting its capital spending for the year,…

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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Assume that Provident Health System, a for-profit hospital, has $1 million in tax-able income for 2020, and its tax rate is 30 percent (combined federal and state tax rates). Given this information, what is the firm’s net income? Suppose the hospital pays out $300,000 in dividends. A shareholder, Carl Wu, receives $10,000. If Carl’s initially paid $100,000 for his shares and faces a tax rate on dividends of 15 percent, what is his after-tax dividend and after-tax rate of return on his investment. Suppose that Aditi Patel currently holds tax-exempt bonds of Good Samaritan Healthcare that pay 7 percent interest. She is in the 40 percent tax bracket. Her broker wants her to buy some Beverly Enterprises taxable bonds that will be issued next week. With all else the same, what rate must be set on the Beverly bonds to make Aditi interested in making a switch? Due date is midnight of day 7. Your submission can be made in WORD or EXCEL. Clearly show your work and provide a concise…
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment orshareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or 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: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, and retail investors. Discuss which decision is best for each group.
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You may attempt this question 3 more times for credit Oak Farms is an unlevered firm with 2050 shares outstanding and an EBIT of 675. Corporate eamings are taxed at a rate of 31% Calculate EPS for Oak Farm Note: Your answer should be in dollars and cents. For example, $0.99 Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $1550 of debit at a cost of 7.70%, and uses these funds to reduce the amount of equity on its books. The partition does not change the EBIT or the tax rate, but does reduce the number of shares outstanding to 1300 Note: Your answer should be in dollars and cents Compute Oak Farms EPS after the partition s You Must Get Both Parts Conect to Receive Credit CHECK ANSWER
Check my work Consider a firm with an EBIT of $866,000. The firm finances its assets with $2,660,000 debt (costing 8 percent and is all tax deductible) and 560,000 shares of stock selling at $5.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 360,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $866,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final answers to 2 decimal places.) EPS before EPS after Difference
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Kyra Ltd. is finance solely with equity. The company considers to obtain a loan of €1,000,000 from a local bank against an interest rate of 8%.This loan will be repaid in 2 years with equal amounts per year.The current corporate tax rate is 35%.Calculate based on the Modigliani & Miller’s proposition 1 with taxes what the added value of the company will be after the announcement of the acceptance of the loan.
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An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corporation. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corporation for the 15 million shares of stock. The investment bank then sells those shares to the public for $11.50 per share. How much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.50, how much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.5 million shares for $10.00 per share, and it charges Looney Landscaping Corporation $0.325 per share sold. How much money does Looney Landscaping Corporation receive? What is the profit to the investment…
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.
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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

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