Question

1. In the Wall Street Journal, looking at the stock transactions on the New York Stock Exchange, the price of a share of McDonald's stock was: $53.67. You buy the stock. Unfortunately, this gets you thinking and you're hungry. (I know, what does this last bit of information have to do with finance? Trust me - read on. FYI, this is obviously NOT a test bank question.) You buy a Big Mac for $2.79. Considering these two transactions (the stock and the Big Mac in that order), they are examples of

2. Below are three-line items from a corporation's Income Statement. Select the correct line to use and compute the federal tax.

Sales:                          $335,000

Cost of Goods Sold:     $225,000

Net Profit Before Tax: $ 92,000

3. A corporation with sales of $250,000 (OK it's a small corporation!) paid $11,250 federal tax on taxable income of $65,000. They also had an end-of-year party where they ordered 50 Big Macs at $2.79 each. Given the above what was their: average tax rate and marginal tax rate?

4. MTU Corporation (it stand for " Made This Up") had sales last year of $1,000,000. They sell heat shields to place on your lap for stupid McD's customers who insist on placing a cup of hot coffee between their legs. The materials cost $80,000 (that's good) but the labor to put them together costs $750,000 (yes they are union and yes the company is looking to move this operation "off-shore" next year but that's beyond the scope of this course). Advertising was just $50,000, as they mostly use word-of-mouth. They did need to raise some money this year. The bank loaned them $150,000 at 8% (that interest is due this year). The interest didn't worry them too much as it was partyly off-set by the dividend check they received from McDonalds for $8,000 (hmmmmm - I wonder if there is a cinflict of interest here?) Anyway, all things considered, "it was a very good year" (and they are not even 17 - there's a joke or trivia item imbedded here - one bonus point if you can explain what it is), so much so they paid their loyal shareholders $50,000 in common stock dividends. OK, given all that, what was their Federal tax bill? NOTE: you MUST show (type in) all work. Label each line item and indicate clearly what your final answer is.

5. According to the May 19th edition of the WSJ, 6 month CDs were yielding 1.45% (nominal rate of interest). If risk were considered to be 0 (zero) and inflation was expected to average .95% for the next two years, what should one conclude the real rate of interest to be?

6. The Acme Bank and Storm Dood Company (good old "AB&SDC") is trying to determine what rate of interest they should pay on the new 6 month CDs they are trying to get customers to buy. Looking at the WSJ here's some interest rates they found:

Prime: 5%; LIBOR: 3.25%; Fed Funds: 1.5%; 10 Month T-Note: 2.42%; 3 Month T-Bill 1.25%.

Believe it or not, AB&SDC has a rather shaky reputation - so much so knowledgeable investors would require an additional 8% to buy Acme's CDs to make up for their high risk of default (ignore maturity and liquidity issues).

Given the above, what nominal rate of interest must Acme's CDs have to pay?

Answer 1