Problem Set 1 Solutions

1. Calculating Taxes. The Herrera Co. had $246,000 in taxable income. Using the rates from Table 2.3 in the chapter calculate the company's income taxes. What is the average tax rate? What is the marginal tax rate?

The total amount of income tax is 0.15($50,000 = $7,500 + 0.25(($75,000 – 50,000) = $6,250 + 0.34(($100,000 – 75,000) = $8,500 + 0.39(($246,000 – 100,000) = $56,940 Total = $79,190

The average tax rate is the total amount of tax divided by taxable income, so:

Average tax rate = $79,190 / $246,000 = 0.3219 or 32.19%

The marginal tax rate is the tax rate on the next $1 of earnings (taxable income). Since taxable income of $246,000 falls in the 39% tax
*…show more content…*

We know that cash flow from assets (CFFA) must be equal to the sum of the cash flow to creditors (CFC) and the cash flow to stockholders (CFS).

We have CFC and CFS from previous two parts. So:

CFC + CFS = CFFA = $18,100 + 2,250 = $20,350.

We also know that CFFA is equal to OCF – Net capital spending – Change in NWC. We already know OCF from the first part. Thus we need to find net capital spending to solve for the Change in NWC.

Net capital spending = (Ending NFA – Beginning NFA) + Depreciation

Since NFA increased by $22,400, it means the ending NFA must be more than the beginning BFA by $22,400. In other words (Ending NFA – Beginning NFA) = $22,400.

Net capital spending = $22,400 + 8,000 = $30,400

Now we can use:

CFFA = OCF – Net capital spending – Change in NWC

$20,350 = $52,540 – 30,400 – Change in NWC. $20,350 = $22,140 – Change in NWC

Change in NWC = $22,140 – $20,350 = $1,790

This means the company increased its NWC by $1,790.

5. Prepare a Balance Sheet. Prepare a 2010 balance sheet for Jarrow Corp. based on the following information: cash = $183,000; patents and copyrights = $695,000; accounts payable = $465,000; accounts receivable = $138,000; tangible net fixed assets = $3,200,000; inventory = $297,000; notes payable = $145,000; accumulated retained earnings = $1,960,000; long-term debt = $1,550,000.

The balance sheet for the company looks like

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