Jai Nagarajan

Professor Frydman

BUAD 306

Homework #1

1. The separation of owners (shareholders) and managers in a corporation proves to have both advantages and disadvantages. An advantage of this separation is that owners can readily transfer shares of stock, and as a result, the stockholders in a corporation have limited liability for corporate debt. Essentially, owners are only at risk of losing the particular amount they invested in the corporation. A significant disadvantage of the separation of owners and managers is that the profits earned by the corporation are taxed twice. The dividends that are ultimately paid out to stockholders are taxed again as personal income after the tax on the corporation’s profits. Also, the managers might not necessarily work in the owner’s interests.

2. First City Bank Simple Interest: $73,000 x (1.08) = $78,840
$78,840 – 73,000 = $5840
$5840 x 6 = $35,040

Second City Bank Compound Interest: (1+r)^t = (1.08)^6 = 1.5869
$73,000 x 1.5869 = $115,841.83
$115,841.83 – 73,000 = $42,841.83

$42,841.83 – 35,040 = $7,801.83 3. PV = $65,000
FV = $200,000
T = 18

400,000 = 65,000 (1+r)^18

400,000/65,000 = (1+r)^18

6.1538 = (1+r)^18

sqrt18(6.1538) = sqrt18 ((1+r)^18)

1.1062 = 1+r

r = 10.62%

4. FV = $210,000
R = 0.14
T = 8

$210,000 = PV x (1.14)^8

$210,000 = PV x 2.8526

$210,000/2.8526 = (PV x 2.8526)/2.8526

PV = $73,617.05

5.
a) 443,000 x (1+r)^30=1,000,000

N = 30, PV = 443,000, FV = 1,000,000, so I/YR = 2.75%

b) 443,000 x (1+r)^11 = 643,380

N = 11, PV = 443,000, FV = 643,380, so I/YR = 3.45%

c)643,380 x (1+r)^19 = 1,000,0000

N = 19, PV = 643,380, FV = 1,000,000, so I/YR = 2.35%

6.
a)

ABC Inc. has $12,100,000 in taxable income:

50,000 x 0.15 = 7500
25,000 x 0.25 = 6250
25,000 x 0.34 = 8500
235,000 x 0.39 = 91,650