FI360 Chapter 1 2 Homework
Chapter 1
P 1-1.
a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will be $500,000 per year under either organizational form. The tax rate on corporate profits is 35% (= 0.35), the average personal tax rate for the partners is also 35% (= 0.35), and the capital gains tax rate on dividend income is 15% (= 0.15).
Business organized as a corporation: ($500,000)(1-0.35)(1-0.15) = $276,250
Meaning investors would only receive $275,250.
Business organized as a partnership: ($500,000)(1-0.35) = $325,000
Meaning investors will receive $325,000.
This difference of organizing a business as a corporation or as a partnership is $48,750 or 9.75%.
b. Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. (These rates were 35% (= 0.35) on corporate profits and 38.6% (= 0.386) on personal investment income.)
Using pre-2003 tax rates, a partnerships’ investors would receive: ($500,000)(1-0.386) = $307,000.
A corporations’ investors would receive: ($500,000)(1-0386)(1-0.35) = $199,550.
The difference here is $107,450 or 21.49%.
Chapter 2
P2-2
Given the balance sheets and selected data from the income statement of SMG Industries that follow, answer parts (a)-(c).
a. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2012, using Equation 2.2.
OCF = NOPAT + Depreciation
OCF = EBIT – Taxes + Depreciation
OCF = $4,500 - $1,300 + $1,600 = $4,800
b. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012, using the Equation 2.4.
FCF = OCF - - ∆WC
FCF = $4,800 – ($31,500-30,100) – ∆CA – ∆A/P – ∆accruals
FCF = $4,800 – $1,400 – ($16,200-14,800) – ($3,600-3,500) – ($1,200-1,300)
FCF = $4,800 – $1,400 – $1,400 – $100 – (-$100)
FCF = $2,000
c. Interpret, compare,
P 1-1.
a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will be $500,000 per year under either organizational form. The tax rate on corporate profits is 35% (= 0.35), the average personal tax rate for the partners is also 35% (= 0.35), and the capital gains tax rate on dividend income is 15% (= 0.15).
Business organized as a corporation: ($500,000)(1-0.35)(1-0.15) = $276,250
Meaning investors would only receive $275,250.
Business organized as a partnership: ($500,000)(1-0.35) = $325,000
Meaning investors will receive $325,000.
This difference of organizing a business as a corporation or as a partnership is $48,750 or 9.75%.
b. Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. (These rates were 35% (= 0.35) on corporate profits and 38.6% (= 0.386) on personal investment income.)
Using pre-2003 tax rates, a partnerships’ investors would receive: ($500,000)(1-0.386) = $307,000.
A corporations’ investors would receive: ($500,000)(1-0386)(1-0.35) = $199,550.
The difference here is $107,450 or 21.49%.
Chapter 2
P2-2
Given the balance sheets and selected data from the income statement of SMG Industries that follow, answer parts (a)-(c).
a. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2012, using Equation 2.2.
OCF = NOPAT + Depreciation
OCF = EBIT – Taxes + Depreciation
OCF = $4,500 - $1,300 + $1,600 = $4,800
b. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012, using the Equation 2.4.
FCF = OCF - - ∆WC
FCF = $4,800 – ($31,500-30,100) – ∆CA – ∆A/P – ∆accruals
FCF = $4,800 – $1,400 – ($16,200-14,800) – ($3,600-3,500) – ($1,200-1,300)
FCF = $4,800 – $1,400 – $1,400 – $100 – (-$100)
FCF = $2,000
c. Interpret, compare,