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120. Bradshaw Beverages began operations in 2008. The table below contains
the company’s taxable income during each year of its operations.
Notice that the company lost money in each of its first three years.
The corporate tax rate has been 40% each year.
Year Taxable Income
2008 -$ 700,000
2009 -$ 500,000
2010 -$ 200,000
2011 $ 800,000
2012 $1,000,000
Assume that the company has taken full advantage of the Tax Code’s
carry-back, carry-forward provisions, and assume that the current
provisions were applicable in 2008. How much did the company pay in
taxes during 2012?
a. $160,000
b. $168,000
c. $176,400
d. $185,220
e. $194,481
121. Uniontown Books began operating in 2008. The company lost money its
first three years of operations, but has had an operating profit during
the past two years. The company’s operating income (EBIT) for its
first five years was as follows:
Year EBIT
2008 -$3,600,000
2009 -$2,000,000
2010 -$1,000,000
2011 $1,200,000
2012 $7,000,000
The company has no debt, and therefore, pays no interest expense. Its
corporate tax rate has remained at 34% during this 5-year period. What
was Uniontown’s tax liability for 2012? (Assume that the company has
taken full advantage of the carry-back and carry-forward provisions,
and assume that the current provisions were applicable in 2008.)
a. $466,412
b. $490,960
c. $516,800
d. $544,000
e. $571,200
122. Mays Industries was established in 2007. Since its inception, the
company has generated the following levels of taxable income (EBT):
Year Taxable Income
2007 $ 50,000
2008 $ 40,000
2009 $ 30,000
2010 $ 20,000
2011 -$100,000
2012 $ 60,000
Assume that each year the company has faced a 40% income tax rate.
Also, assume that the company has taken full advantage of the Tax
Code’s carry-back, carry-forward provisions, and assume that the
current provisions were applicable in 2007. What is the company’s tax
liability for 2012?
a. $4,000
b. $4,200
c. $4,410
d. $4,631
e. $4,862
123. Moose Industries faces the following tax schedule:
Tax on Base Percentage on
Taxable Income of Bracket Excess above Base
Up to $50,000 $ 0 15%
$50,000-$75,000 7,500 25
$75,000-$100,000 13,750 34
$100,000-$335,000 22,250 39
$335,000-$10,000,000 113,900 34
$10,000,000-$15,000,000 3,400,000 35
$15,000,000-$18,333,333 5,150,000 38
Over $18,333,333 6,416,667 35
Last year the company realized $10,000,000 in operating income (EBIT).
Its annual interest expense is $1,500,000. What was the company’s net
income for the year?
a. $4,809,874
b. $5,063,025
c. $5,329,500
d. $5,610,000
e. $5,890,500
124. Corporations face the following tax schedule:
Tax on Base Percentage on
Taxable Income of Bracket Excess above Base
Up to $50,000 $ 0 15%
$50,000-$75,000 7,500 25
$75,000-$100,000 13,750 34
$100,000-$335,000 22,250 39
$335,000-$10,000,000 113,900 34
$10,000,000-$15,000,000 3,400,000 35
$15,000,000-$18,333,333 5,150,000 38
Over $18,333,333 6,416,667 35
Company Z has $80,000 of taxable income from its operations, $5,000 of
interest income, and $30,000 of dividend income from preferred stock it
holds in other corporations. What is Company Z’s tax liability?
a. $17,328
b. $18,240
c. $19,200
d. $20,210
e. $21,221
125. Lintner Beverage Corp. reported the following information from their
financial statements:
Operating income (EBIT) = $20,000,000
Interest payments on long-term debt = $1,750,000
Dividend income = $1,000,000
Calculate Lintner's total tax liability using the corporate tax
schedule below:
Tax on Base Percentage on
Taxable Income of Bracket Excess above Base
$0-$50,000 $ 0 15%
$50,000-$75,000 7,500 25
$75,000-$100,000 13,750 34
$100,000-$335,000 22,250 39
$335,000-$10,000,000 113,900 34
$10,000,000-$15,000,000 3,400,000 35
$15,000,000-$18,333,333 5,150,000 38
Over $18,333,333 6,416,667 35
a. $6,167,875
b. $6,492,500
c. $6,817,125
d. $7,157,982
e. $7,515,881
126. Last year, Martyn Company had $500,000 in taxable income from its
operations, $50,000 in interest income, and $100,000 in dividend
income. Using the corporate tax rate table given below, what was the
company’s tax liability for the year?
Tax on Base Percentage on
Taxable Income of Bracket Excess above Base
$0-$50,000 $ 0 15%
$50,000-$75,000 7,500 25
$75,000-$100,000 13,750 34
$100,000-$335,000 22,250 39
$335,000-$10,000,000 113,900 34
$10,000,000-$15,000,000 3,400,000 35
$15,000,000-$18,333,333 5,150,000 38
Over $18,333,333 6,416,667 35
a. $177,973
b. $187,340
c. $197,200
d. $207,060
e. $217,413
127. Griffey Communications recently realized $125,000 in operating income.
The company had interest income of $25,000 and realized $70,000 in
dividend income. The company’s interest expense was $40,000.
Tax on Base Percentage on
Taxable Income of Bracket Excess above Base
Up to $50,000 $ 0 15%
$50,000-$75,000 7,500 25
$75,000-$100,000 13,750 34
$100,000-$335,000 22,250 39
$335,000-$10,000,000 113,900 34
$10,000,000-$15,000,000 3,400,000 35
$15,000,000-$18,333,333 5,150,000 38
Over $18,333,333 6,416,667 35
Using the corporate tax schedule above, what is Griffey’s tax
liability?
a. $29,442
b. $30,992
c. $32,623
d. $34,340
e. $36,057
128. Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of
operating costs other than depreciation, and $1,250 of depreciation.
The company had $3,500 of bonds outstanding that carry a 6.5% interest
rate, and its federal-plus-state income tax rate was 35%. During last
year, the firm had expenditures on fixed assets and net operating
working capital that totaled $2,000. These expenditures were necessary
for it to sustain operations and generate future sales and cash flows.
This year's data are expected to remain unchanged except for one item,
depreciation, which is expected to increase by $725. By how much will
the depreciation change cause (1) the firm's net income and (2) its
free cash flow to change? Note that the company uses the same
depreciation for tax and stockholder reporting purposes.
a. -$383.84; $206.68
b. -$404.04; $217.56
c. -$425.30; $229.01
d. -$447.69; $241.06
e. -$471.25; $253.75
129. Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of
operating costs other than depreciation, and $650 of depreciation. The
company had $3,200 of outstanding bonds that carry a 5% interest rate,
and its federal-plus-state income tax rate was 35%. In order to
sustain its operations and thus generate future sales and cash flows,
the firm was required to make $1,250 of capital expenditures on new
fixed assets and to invest $300 in net operating working capital. By
how much did the firm's net income exceed its free cash flow?
a. $718
b. $756
c. $796
d. $836
e. $878
130. For 2012, Bargain Basement Stores reported $11,500 of sales and $5,000
of operating costs (including depreciation). The company has $20,500
of investor-supplied operating assets (or capital), the weighted
average cost of that capital (the WACC) was 10%, and the federal-plus-
state income tax rate was 40%. What was the firm's Economic Value
Added (EVA), i.e., how much value did management add to stockholders'
wealth during 2012?
a. $1,670
b. $1,758
c. $1,850
d. $1,943
e. $2,040
CHAPTER 3
ANSWERS AND SOLUTIONS
