Term Paper

Subject: GB550-03N: Financial Management

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Date: 15 December 2012

Unit 2 Assignment

Chapter 2

2-8. The Wendt Corporation had $10.5 million of taxable income.

a. What is the company’s federal income tax bill for the year?

The entire amount of federal income tax for the year that the Wendt Corporation would have to pay would be $3,750,000. The company has taxable income over 10 million, so automatically must pay 3.4 million dollars. Then, they must add a 35% for the half a million dollars over 10 million. This means the company must pay $175,000.

b. Assume the firm receives an additional $1 million of interest income from bonds it owns. What is the tax on this interest income?

The situation seems to be similar to the previous response. The Wendt Corporation will still be forced to pay 35% on the 1 million dollars that it would receive in interest income from its bonds. The total from 35% of 1 million would be $350,000. The after tax income for the Wendt Corporation would be $650,000.

c. Now assume that Wendt does not receive interest income but does receive an additional $1 million as dividends on some stock it owns. What is the tax on this dividend income?

Unfortunately, the Wendt Corporation will still be forced to pay 35% on the additional dividends. Although, 70% of the dividends received will be excluded from taxable income. The other 30% will be taxed at a normal rate. The Wendt Corporation’s tax on this dividend income would be $105,000. This calculated by using this formula 0.35[(0.30)(1,000,000)].

Chapter 3

3-6. Donaldson & Son has an ROA of 10%, a 2 % profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier?

Total Asset Turnover = Sales/Total Assets

Total Sales = $10,000

Total Assets = $2,000

$10,000/$2,000

Total Asset Turnover = 5

Firm’s Equity Multiplier

Total Assets/Common Equity

$2000/$1333...