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# 2.6 In its most recent financial statements, Newhouse Inc.

reported \$50 million of net incomeand \$810 million of retained earnings. The previous retained earnings were \$780 million.How much in dividends was paid to shareholders during the year? New Balance retained earning = Previous Balance retained earning + net income Dividend paid Dividend paid = Previous Balance retained earning + net income - New Balance retained earning Dividend = \$780 million + \$50 million - \$810 million = \$830 million - \$810 million = \$20 million 2.7 The Talley Corporation had a taxable income of \$365,000 from operations after all operatingcosts but before (1) interest charges of \$50,000, (2) dividends received of \$15,000, (3)dividends paid of \$25,000, and (4) income taxes. a)What are the firms income tax liability and its after-tax income? b)What are the companys marginal and average tax rates on taxable income? For a corporation, 70% of dividends received are excluded from taxes; so taxable dividendsare calculated with the remained 30% (page 72 of the book). Companys Tax Liability: Taxable operating income \$ 365,000 Taxable interest (\$ 50,000) Taxable dividend received\$ 4,50015000*(1 0.70)Total taxable income\$ 319,500 The marginal rate for this company is 39% (this information is in the corporate tax rate tablein page 71)The non-taxable dividends are: \$15,000 * 0.7 = \$ 10,500The tax is:Tax Liability =\$ 22,250 + (319,500 100,000)*0.39 = \$ 107,855After Tax-income:Taxable income \$ 319,500Taxable (\$ 107855)Non-taxable dividendReceived 15000*(0.70) \$ 10,500Net income \$ 222,145Average tax rate = Taxable interest income / Taxable operating income= 107855 / 319500 = 0.337574 *100%= 33.7574 = 33.76 %Average tax rate is 33.8 %2.9 The Shrieves Corporation has \$10,000 that it plans to invest in marketable securities. It ischoosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrievesscorporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates returns on all three securitiesInvest = \$ 10,000AT&T bonds = 7.5%State of Florida muni bonds = 5%AT&T preferred stock = 6 %Corporate tax rate = 35% Aft er Taxes AT&T bond = 7.5% * 10000 = 0.075 * 10000 = \$ 750Taxes = 750 * 0.35 = \$ 262.50 \$ 750 262.50 = \$487.50Yield AT&T bond = 487.50 / 10,000 = 0.04875 *100% = 4.875 %Yield AT&T bond = 4.875 %AT&T preferred stock = 6% * 10000 = 0.06 * 10000 = \$600Tax exemption 70% = 600 * 0.7 = \$ 420Taxable = \$600 - \$420 = \$ 180Taxes = \$ 180 * 0.35 = \$ 63 in taxes\$ 600 - \$ 63 = \$ 537Yield = 537 / 10000 = 0.0537 * 100% = 5.37%Yield AT&T

preferred stock = 5.37 %State of Florida muni bonds = 5%Muni bonds =10000 * 0.05 = \$500There are not taxable, so no taxes deduction.Yield = \$500 / 10000 = 0.05 * 100 % = 5 %Yield State of Florida muni bonds = 5%