Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 2, Problem 17QP
Marginal versus Average Tax Rates (Refer to Table 2.3.) Corporation Growth has $82,500 in taxable income, and Corporation Income has $8,250,000 in taxable income.
- a. What is the tax bill for each firm?
- b. Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each firm pay? Why is this amount the same?
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Students have asked these similar questions
1) Suppose your firm earns $9 million in taxable income.What is the firm's tax liability?What is the average tax rate?What is the marginal tax rate? 50,000 15%50,001 - 75,000 25%75,001- 100,000. 34%100,001-335,000 39%335,001-10,000,000 34%10,000,001-15,000,000. 35%15,000,001-18,333,333 38%18,333,334- 34%
.......................................
2) Entity X earns 6 $ per share. If the discount rate or equity cost to be applied by the company is 20% and the investment profitability is 16%;a) According to the Walter formula, what would the price of shares be in $ if the business had distributed 50% profit?
b) According to Walter, is this the optimum rate of dividend distribution? Explain
Example: Marginal Vs. Average Rates
Suppose your firm earns $4 million in taxable income.
What is the firm's tax liability?
●
●
What is the average tax rate?
What is the marginal tax rate?
50,000*0.15
25,000*0.25
25000*0.34
235000*0.39
(4,000,000-335,000) *0.34
Total tax liability
Average tax rate
Marginal tax rate
7,500
6,250
8,500
91,650
1,246,100
1,360,000
If
f you are considering a project that will increase the firm's
taxable income by $1 million, what tax rate should you use in
your analysis?
Is it marginal or average tax rate that is normally relevant for
financial decision making?
34%
34%
Suppose a firm's tax rate is 25%.
1. What effect would a $10.92 million operating expense have on this year's earnings? What effect would it have on next year's earnings? (Select all the choices that apply.)
A. $10.92 million operating expense would be immediately expensed, increasing operating expenses by $10.92
million. This would lead to a reduction in taxes of 25%×$10.92 million=$2.73 million.
B. A $10.92 million operating expense would be immediately expensed, increasing operating expenses by $10.92 million. This would lead to an increase in taxes of 25%×$10.92 million=$2.73 million
C. Earnings would decline by $10.92 million−$2.73 million=$8.19 million. There would be no effect on next year's earnings.
D. Earnings would decline by $10.92 million−$2.73 million=$8.19 million. The same effect would be seen on next year's earnings
2. What effect would a $10.25 million capital expense have on this year's earnings if the capital expenditure is depreciated at a rate of $2.05…
Chapter 2 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 2 - Prob. 1CQCh. 2 - Prob. 2CQCh. 2 - Prob. 3CQCh. 2 - Prob. 4CQCh. 2 - Prob. 5CQCh. 2 - Cash Flow from Assets Why is it not necessarily...Ch. 2 - Operating Cash flow Why is it not necessarily bad...Ch. 2 - Net Working Capital and Capital Spending Could a...Ch. 2 - Cash Flow to Stockholders and Creditors Could a...Ch. 2 - Prob. 10CQ
Ch. 2 - Building a Balance Sheet Sankey, Inc., has current...Ch. 2 - Building an Income Statement Shellon, Inc., has...Ch. 2 - Market Values and Book Values Klingon Cruisers,...Ch. 2 - Prob. 4QPCh. 2 - Calculating OCF Barrell, Inc., has sales of...Ch. 2 - Calculating Net Capital Spending Gordon Driving...Ch. 2 - Building a Balance Sheet The following table...Ch. 2 - Cash Flow to Creditors The 2014 balance sheet of...Ch. 2 - Cash. Flow to Stockholders The 2014 balance sheet...Ch. 2 - Prob. 10QPCh. 2 - Cash Flows Ritter Corporations accountants...Ch. 2 - Financial Cash flows The Stancil Corporation...Ch. 2 - Building an Income Statement During the year, the...Ch. 2 - Calculating total Cash Flows Schwert Corp. shows...Ch. 2 - Using Income Statements Given the .following...Ch. 2 - Prob. 16QPCh. 2 - Marginal versus Average Tax Rates (Refer to Table...Ch. 2 - Prob. 18QPCh. 2 - Accounting Values versus Cash Flows In Problem 18,...Ch. 2 - Calculating Cash Flows Cusic Industries had the...Ch. 2 - Prob. 21QPCh. 2 - Use the following information for Ingersoll, Inc.,...Ch. 2 - Prob. 23QPCh. 2 - Prob. 24QPCh. 2 - Net Fixed Assets and Depreciation On the balance...Ch. 2 - Prob. 26QPCh. 2 - Prob. 1MCCh. 2 - Prob. 2MCCh. 2 - Prob. 3MC
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- Suppose the firm makes the change but its competitors react by making similar changes to their own credit terms, with the net result being that gross sales remain at the current 1,000,000 level. What would be the impact on the firms after-tax profitability?arrow_forwardSuppose a firm’s tax rate is 25%. 1. What effect would a $9.26 million operating expense have on this year's earnings? What effect would it have on next year's earnings? (Select all the choices thatapply.) A. A $9.26 million operating expense would be immediately expensed, increasing operating expenses by $9.26 million. This would lead to a reduction in taxes of 25%×$9.26 million=$2.32 million. B. A $9.26 million operating expense would be immediately expensed, increasing operating expenses by $9.26 million. This would lead to an increase in taxes of 25%×$9.26 million =$2.32 million. C. Earnings would decline by $9.26 million−$2.32 million=$6.94 million. The same effect would be seen on next year's earnings. D. Earnings would decline by $9.26 million−$2.32 million=$6.94 million. There would be no effect on next year's earnings. 2. What effect would a $11.75 million capital expense have on this year's earnings if the capital expenditure is depreciated at a rate of $2.35 million…arrow_forwardAssume a firm increases its revenue by $148 while increasing its cost of goods sold by $117. How much additional tax will the firm owe if its marginal tax rate is 21%? Multiple Choice $6.51 $10.86 $17.11 $28.36arrow_forward
- Give typing answer with explanation and conclusion Consider two firms, Alpha, Inc. and Omega Corporation. Both corporations will either make $20 million or lose $10 million every year with equal probability. The firms' profits are perfectly positively correlated. That is, any year Alpha, Inc. earns $20 million, Omega Corporation also makes $20 million, and the same is true of a losing year. Assume that the corporate tax rate is 34%. What are the total expected after-tax profits of both firms when they are two separate firms?arrow_forwardAnswer the following questions based on the information in the table. Assume a tax rate of 30 percent. For simplicity, assume that the companies have no other liabilities other than the debt shown. (All dollars are in millions.) \table[[,\table[[Atlantic],[Corporation]],Pacific],[Earnings before interest and taxes,$470,$470arrow_forwardSuppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 12 percent while its cost of equity is 16 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield.What will be JB’s WACC? (Round your answer to 2 decimal places.) WACC: ___.__%arrow_forward
- 2arrow_forwardA firm has a tax burden ratio of 0.85, a leverage ratio of 1.25, an interest burden of 0.7, and a return on sales of 10 The firm generates $2 in sales per dollar of assets. What is the firm's ROE? (Do not round intermediate calculations. Round your answer to 2 decimal place.) ROEarrow_forwardWhat is the firms ROE?arrow_forward
- If the state tax rate is 20% and the federal tax rate is 30%, what is the total effective tax rate? a. 34% b. 50% c. 44% d. 37% 2. Holding all other variables constant, which of the following would increase return on equity? An increase in _____________. a. the tax rate b. the equity ratio (equity/total assets) c. total assets d. total asset turnoverarrow_forwardSuppose a firm's tax rate is 25%. a. What effect would a$9.85 million operating expense have on this year's earnings? What effect would it have on next year's earnings? b. What effect would an $8.95million capital expense have on this year's earnings if the capital is depreciated at a rate of $1.79 million per year for five years? What effect would it have on next year's earnings?arrow_forwardIf Average assets and capital are 900,000 and 540,000, respectively, with an ROE of 0.046, how much is the net income before tax of the company? Assume 20% corporate tax. All the options have equal benefits. No peso sign, with comma, two decimal points.arrow_forward
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