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
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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
E. Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.
24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?
Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28% in accordance with the Net Present Value which is $500,000 the question being would still be worth it to make the investment to the company (Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these calculations the investment would not
(A) Using your own numbers, show clearly why such a tax is regressive. (15 points)
Note: To make the balance sheet balance, define cash as equal to (Current liabilities + Net worth) – (Accounts receivable + Inventory + Other current assets + Net fixed assets).
In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.
The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
Once the prevailing WACC rate was found, the target WACC was calculated to be 9.00%. Again the CAPM model was used but a new the required rate of return on equity needed to be calculated. Since there is a change in the capital structure an unlevered beta needed to be determined. The Hamada equation was used to unlever the beta, which had a debt to equity ratio of .70, then to re-lever it again with a debt to equity ratio of 1.5; this changed the beta from
6.The Year 0 net investment outlay for the project is $-475,000. This computed by adding the price of the machinery, installation, shipping, and the change in net working capital. The non-operating cash flow when the project is
For the tax rate we took the average tax rate from 2004-2006. The tax rate is 39.7%.
All this changes made the CFFO give negative results. The Account payable increased to $ 100,332. All this accounts are making the difference in the cash flow. A/R has not had much money in its account $15,840 for 1998 and $18,878 for 1999.
Tax retention rate is high in 1994 as compared to previous years. It means tax rates are reduced in 1994.
As we can see in J&J’s balance sheet, the total assets (total liabilities + total stockholders’ equity) for 2009 was $94,682.
The new project requires an increase in inventories in year 0 and year 3. This will change the net working capital. It will represent an outflow for year 0 and 3, and an inflow when the project terminates because we will recover it.