Principles of Finance Class - Exam Review

Problem 1 – After Tax Returns (10 Points)

Lovell Co. purchased preferred stock in another company. The preferred
stock’s before tax yield was 8.4 percent. The tax rate on corporate
income is 40 percent. What is the after tax return on the preferred
stock?

A bond issued by the State of Pennsylvania provides a 9 % yield. What
yield on a Synthetic Chemical bond would cause the two bonds to provide
the same after tax rate of return to an investor in the 36 percent tax
bracket?

Problem 2 – Corporate Income Tax (10 Points)

Griffey Communications has $125,000 of operating income. In addition,
the company has interest income (all of it taxable) of $25,000, and it
realized $70,000 in dividend income. The company’s interest expense
was $40,000.

Taxable Income Tax Rate

Up to $50,000 15 %

$50,000 to $75,000 25 %

$75,000 to $100,000 34 %

$100,000 to $335,000 39 %

$335,000 t0 $10,000,000 34 %

Using the corporate tax schedule shown above, what is Griffey’s tax
liability and earnings after tax?