Fin3

1. ANS: E

BT municipal bond yield | 8.80% |

BT bond yield | 11.75% |

BT preferred yield | 9.80% |

Tax rate | 38.00% |

Dividend exclusion % | 70.00% |

Since municipal bonds are exempt from federal taxes, its BT return = AT return

AT municipal bond yield 8.800%

AT bond yield = BT bond yield (1 – T)

AT bond yield = 7.285%

AT preferred yield = BT pref. return [1 – (1 – Div exclusion%)(T)]

AT preferred yield = 8.683%

Highest AT yield = 8.800%

TOP: (3-7) After-tax returns

2. ANS: A

Tax rate | 34% | |

| | | EBT After | Unused |

| | Carry-Forward | Forward | Carryable |

Year | Tax. Income | Used | Applied | Amount |

2004 | -$1,800,000 | $0 | $0 | $1,800,000 |

2005 | -$2,000,000 | $0 | $0 | $3,800,000 |

2006 | -$1,000,000 | $0 | $0 | $4,800,000 |

2007 | $1,200,000 | $1,200,000 | $0 | $3,600,000 |

2008 | $7,000,000 | $3,600,000 | $3,400,000 | $0 |

2008 Tax liability = EBT Tax rate

2008 Tax liability = $1,156,000

TOP: (3-7) Carry-back, carry-forward

3. ANS: C

Operating income | $360,000 |

Interest income | $50,000 |

Dividend income | $100,000 |

Dividend exclusion % | 70% |

Taxable income = Operating income + Interest income + Taxable dividend income

Taxable income = Operating income + Interest income + Dividend income

(1 – Dividend exclusion%)

Taxable income = $440,000

Taxable Income | Tax on Base of Bracket | % on Excess above Base |

$0 | $0 | 15% |

$50,000 | 7,500 | 25% |

$75,000 | 13,750 | 34% |

$100,000 | 22,250 | 39% |

$335,000 | 113,900 | 34% |

$10,000,000 | 3,400,000 | 35% |

$15,000,000 | 5,150,000 | 38% |

$18,333,333 | 6,416,667 | 35% |

Tax on base = | $113,900 |

Tax on excess base = | $35,700 |

Tax liability = | $149,600 |

TOP: (3-7) Corporate taxes

4. ANS: C

Total assets = Equity because zero debt | | | $375,000 |

Sales | | | | | $515,000 |

Net income | | | | $25,000 |...