Finance Chapter 2 3 Debt Versus Equity Financing You Are Considering Stock Investment One Two

47. Debt versus Equity Financing You are considering a stock investment in one of two

firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have

identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million in assets with $1

million in debt (on which it pays 10 percent interest annually) and $0.2 million in equity. AllEquity,

Inc. finances its $1.2 million in assets with no debt and $1.2 million in equity. Both firms pay a tax

rate of 30 percent on their taxable income. What are the asset funders’ (the debt holders and

stockholders) resulting return on assets for the two firms?

48. Debt versus Equity Financing You are considering a stock investment in one of two

firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have

identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5

million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity,

Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax

rate of 40 percent on their taxable income. What are the asset funders’ (the debt holders and

stockholders) resulting return on assets for the two firms?

49. Debt versus Equity Financing You are considering a stock investment in one of two

firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have

identical operating income of $400,000. AllDebt, Inc. finances its $800,000 in assets with

$600,000 in debt (on which it pays 5 percent interest annually) and $200,000 in equity. AllEquity,

Inc. finances its $800,000 in assets with no debt and $800,000 in equity. Both firms pay a tax rate

of 30 percent on their taxable income. What are the asset funders’ (the debt holders and

stockholders) resulting return on assets for the two firms?

50. Income Statement You have been given the following information for Fina’s Furniture

Corp.:

Net sales = $25,500,000;

Cost of goods sold = $10,250,000;

Addition to retained earnings = $305,000;

Dividends paid to preferred and common stockholders = $500,000;

Interest expense = $2,000,000.

The firm’s tax rate is 30 percent. What is the depreciation expense for Fina’s Furniture Corp.?

2-46

51. Income Statement You have been given the following information for Romeo’s Rockers

Corp.:

Net sales = $5,200,000;

Cost of goods sold = $2,100,000;

Addition to retained earnings = $1,000,000;

Dividends paid to preferred and common stockholders = $400,000;

Interest expense = $200,000.

The firm’s tax rate is 30 percent. What is the depreciation expense for Romeo’s Rockers Corp.?

52. Income Statement You have been given the following information for Nicole’s Neckties

Corp.:

Net sales = $2,500,000;

Cost of goods sold = $1,300,000;

Addition to retained earnings = $30,000;

Dividends paid to preferred and common stockholders = $300,000;

Interest expense = $50,000.

The firm’s tax rate is 40 percent. What is the depreciation expense for Nicole’s Neckties Corp.?

53. Income Statement You have been given the following information for Sherry’s Sandwich

Corp.:

Net sales = $300,000;

Gross profit = $100,000;

Addition to retained earnings = $30,000;

Dividends paid to preferred and common stockholders = $8,500;

Depreciation expense = $25,000.

The firm’s tax rate is 30 percent. What are the cost of goods sold and the interest expense for

Sherry’s Sandwich Corp.?

54. Income Statement You have been given the following information for Kaye’s Krumpet

Corp.:

Net sales = $150,000;

Gross profit = $100,000;

Addition to retained earnings = $20,000;

Dividends paid to preferred and common stockholders = $8,000;

Depreciation expense = $50,000.

The firm’s tax rate is 30 percent. What are the cost of goods sold and the interest expense for

Kaye’s Krumpet Corp.?

55. Income Statement You have been given the following information for Ross’s Rocket

Corp.:

Net sales = $1,000,000;

Gross profit = $400,000;

Addition to retained earnings = $60,000;

Dividends paid to preferred and common stockholders = $90,000;

Depreciation expense = $50,000.

The firm’s tax rate is 40 percent. What are the cost of goods sold and the interest expense for

Ross’s Rocket Corp.?

56. Corporate Taxes The Carolina Corporation had a 2013 taxable income of $3,000,000

from operations after all operating costs but before

(1) interest charges of $500,000,

(2) dividends received of $75,000,

(3) dividends paid of $1,000,000, and

(4) income taxes.

Using the tax schedule in Table 2.3, what is Carolina’s income tax liability?

What are Carolina’s average and marginal tax rates on taxable income from operations?

57. Corporate Taxes The Ohio Corporation had a 2013 taxable income of $50,000,000 from

operations after all operating costs but before

(1) interest charges of $500,000,

(2) dividends received of $45,000,

(3) dividends paid of $10,000,000, and

(4) income taxes.

Using the tax schedule in Table 2.3, what is Ohio’s income tax liability?

What are Ohio’s average and marginal tax rates on taxable income from operations?

58. Corporate Taxes The Sasnak Corporation had a 2013 taxable income of $4,450,000 from

operations after all operating costs but before

(1) interest charges of $750,000,

(2) dividends received of $900,000,

(3) dividends paid of $500,000, and

(4) income taxes.

Using the tax schedule in Table 2.3, what is Sasnak’s income tax liability?

What are Sasnak’s average and marginal tax rates on taxable income from operations?

59. Corporate Taxes The AOK Corporation had a 2013 taxable income of $2,200,000 from

operations after all operating costs but before

(1) interest charges of $90,000,

(2) dividends received of $750,000,

(3) dividends paid of $80,000, and

(4) income taxes.

Using the tax schedule in Table 2.3, what is AOK’s income tax liability?

What are AOK’s average and marginal tax rates on taxable income from operations?

60. Corporate Taxes Suppose that in addition to the $5.5 million of taxable income from

operations, Emily’s Flowers, Inc. received $500,000 of interest on state-issued bonds and

$300,000 of dividends on common stock it owns in Amy’s Iris Bulbs, Inc.

Using the tax schedule in Table 2.3 what is Emily’s Flowers’ income tax liability?

What are Emily’s Flowers’ average and marginal tax rates on total taxable income?