# harmeling enterprises experienced a decline in net operating

[removed]E. e. \$800,000

Ryngaert & Sons, Inc. has operating income (EBIT) of \$2,500,000. The company’s depreciation expense is \$450,000, its interest expense is \$120,000, and it faces a 40 percent tax rate. What is the company’s net income?

 [removed]A. a. \$1,890,000 [removed]B. b. \$1,575,000 [removed]C. c. \$1,428,000 [removed]D. d. \$1,248,000 [removed]E. e. \$1,358,000 Question 12 of 20

A firm purchases \$10 million of corporate bonds that paid a 16 percent interest rate, or \$1.6 million in interest. If the firm’s marginal tax rate is 40 percent, what is the after-tax interest yield?

 [removed]A. a. 9.60% [removed]B. b. 8.74% [removed]C. c. 7.40% [removed]D. d. 12.90% [removed]E. e. 13.20%

A firm invests in the common stock of another company having a 16 percent before-tax dividend yield. If the firm’s marginal tax rate is 40 percent what is the after-tax dividend yield?

 [removed]A. a. 8.63% [removed]B. b. 9.64% [removed]C. c. 10.40% [removed]D. d. 14.08% [removed]E. e. 13.10% Question 14 of 20

The Carter Company’s taxable income and income tax payments are shown below for 2003 through 2006:

 Year Taxable Income Tax Payment 2003 \$10,000 \$1500 2004 5,000 750 2005 12,000 1,800 2006 8000 1,200

Assume that Carter’s tax rate for all 4 years was a flat 15 percent; that is, each dollar of taxable income was taxed at 15 percent. In 2007, Carter incurred a loss of \$19,000. Using corporate loss carry-back, what is Carter’s adjusted tax payment for 2006?

 [removed]A. a. \$230 [removed]B. b. \$150 [removed]C. c. \$630 [removed]D. d. \$550 [removed]E. e. \$830

A firm can undertake a new project that will generate a before-tax return of 20 percent or it can invest the same funds in the preferred stock of another company that yields 13 percent before taxes. If the only consideration is which alternative provides the highest relevant (after-tax) return and the applicable tax rate is 40 percent, should the firm invest in the project or the preferred stock?

 [removed]A. a. Preferred stock; its relevant return is 11.44 percent. [removed]B. b. Project; its relevant return is 0.56 percentage points higher. [removed]C. c. Project; its after-tax return is 12 percent. [removed]D. d. Either alternative can be chosen; they have the same relevant return. [removed]E. e. All of the above are correct except a and d.

Cooley Corporation has \$20,000 that it plans to invest in marketable securities. It is choosing between MCI bonds which yield 10 percent, state of Colorado municipal bonds which yield 7 percent, and MCI preferred stock with a dividend yield of 8 percent. Cooley’s corporate tax rate is 40 percent, and 70 percent of its dividends received are tax exempt. What is the after-tax rate of return on the highest yielding security?

 [removed]A. a. 7.04% [removed]B. b. 7.0% [removed]C. c. 8.43% [removed]D. d. 6.9% [removed]E. e. 6.0%

GPD Corporation has operating income (EBIT) of \$300,000, total assets of \$1,500,000, and its capital structure consists of 40 percent debt and 60 percent equity. Total assets were equal to total operating capital. The firm’s after-tax cost of capital is 11 percent and its tax rate is 40 percent. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of stock is \$30.00. What is the firm’s Market Value Added (MVA)?

 [removed]A. a. \$87,000 [removed]B. b. \$29,500 [removed]C. c. \$470,810 [removed]D. d. \$600,000 [removed]E. e. \$910,000

GPD Corporation has operating income (EBIT) of \$300,000, total assets of \$1,500,000, and its capital structure consists of 40 percent debt and 60 percent equity. Total assets were equal to total operating capital. The firm’s after-tax cost of capital is 11 percent and its tax rate is 40 percent. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of stock is \$30.00. What is the firm’s Economic Value Added (EVA)?

 [removed]A. a. \$15,000 [removed]B. b. \$17,000 [removed]C. c. \$87,410 [removed]D. d. \$183,210 [removed]E. e. \$14,500

An individual with substantial personal wealth and income is considering the possibility of opening a new business. The business will have a relatively high degree of risk, and losses may be incurred for the first several years. Which legal form of business organization would probably be best?

 [removed]A. a. Proprietorship [removed]B. b. Corporation [removed]C. c. Partnership [removed]D. d. S corporation [removed]E. e. Limited partnership

Which of the following statements is correct?

 [removed]A. a. In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources. [removed]B. b. Under our current tax laws, when investors pay taxes on their dividend income, they are being subjected to a form of double taxation. [removed]C. c. The fact that a percentage of the interest received by one corporation, which is paid by another corporation, is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. [removed]D. d. If the tax laws stated that \$0.50 out of every \$1.00 of interest paid by a corporation was allowed as a tadeductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant. [removed]E. e. Statements b and d are both correct.