Question

In: Finance

1) Citizens Bank offers 4.8% (APR) monthly compound interest on your deposit. If you deposit $200...

1) Citizens Bank offers 4.8% (APR) monthly compound interest on your deposit. If you deposit $200 today, what is your account balance after 5 years assuming no withdraw?

2)Use the following corporate tax rate table to answer the question:

Taxable income

Marginal Tax rate

$           0 – $ 50,000

15%

$ 50,001 – $ 75,000

25%

$ 75,001 – $100,000

34%

$ 100,001 – $335,000

39%

Honey Donuts reported 2017 taxable income of $250,000.

How much is the firm's tax bill?

What is the average tax rate?

3)Given the following income statement data, calculate net income. sales = $2,500, cost of goods sold = $1,800, expenses, depreciation, and amortization = $200, interest expense = $50, average tax rate = 35%.

4)If current assets = $125, fixed assets = $300, long-term debt = $80, and shareholders' equity = $275, what is the value of current liabilities if it is the only other item on the balance sheet?

5)You are considering Massachusetts State Municipal Bond that is paying a yield of 10.08 %. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities (Corporate Bond) that pay at least what level of before-tax yield?

6)If corporate bond yields are at 7.8% and municipal bond yields are at 5.5%, at what federal income tax rate would you be indifferent between owning either of these bonds? (i.e., they will offer the same after tax yield to you) Ignore the impact of state and local taxes.

7)Your uncle has a personal income tax rate 35%. If his after tax return rate from General Electric bonds was 5.6% for year 2017, what must be the before tax return rate on the bond?

Solutions

Expert Solution

1] The account balance after 5 years = 200*(1+0.048/12)^60 = $      254.13
2] Tax bill = 50000*15%+25000*25%+25000*34%+(250000-100000)*39% = $      80,750
Average tax rate = 80750/250000 = 32.30%
3] Sales $   2,500.00
Cost of goods sold $   1,800.00
Gross profit $      700.00
Expenses $      200.00
Operating profit $      500.00
Interest $         50.00
Income before tax $      450.00
Tax at 35% $      157.50
Net income $      292.50
4] Total liabilities + Equity = Total assets = 125+300 = 425
Current liabilities = 425-LT debt-Equity = 425-80-275 = $         70.00
5] 10.08% should be after tax yield = 10.08/(1-0.28) = 14.00%
6] We have the equality
7.8*(1-t) = 5.5
t=(7.8-5.5)/7.8 = 29.49%
7] Before tax rate = 5.6/(1-0.35) = 8.62%

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