P1-1
a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership. Partnership Corporation
Operating Income $500,000 $500,000
Less Tc = 0.35 0 $175,000
Net Income $500,000 $325,000
Cash dividends $500,000 $325,000
Less Tdiv = 0.15 0 $48,750
Less Tp = 0.35 $175,000 0
After tax disposable income = $325,000 $276,250

b. Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. Partnership Corporation
Operating Income $500,000 $500,000
Less Tc = 0.35 0 $175,000
Net Income $500,000 $325,000
Cash dividends $500,000 $325,000
Less Tdiv = 0.15 0 $48,750
Less Tp = 0.386 $193,000 0
After tax disposable income = $307,000 $276,250

P2-2
a. OCF = NOPAT + DEPRECIATE = $2,400 + $1600 = $4,000
b. FCF = OCF – FA - WC = $4,000 - $1,400 - $1,300 = $1,300
c. There is a $2,700 difference in the two cash flow estimates, the OCF is the amount the firm received for its business operations. The FCF is the money that represents true profit. While the $4,000 is a larger number this money will be used to pay expenses, while the FCF is extra and can be used to pay investors or to pay more towards decreasing debt.

P2-4
The appropriate action on Aluminum Industries Inc loan request, in regards to its debt ratio would be to deny the request. For three reasons:
1. The Firms debt ratio is 73%, which is 22% higher than the industry average of 51%. A firms debt ratio measures the proportion of total assests financed by the firm’s creditors. 73% is considered to be a high number and tells me that the firm has a high reliance on borrowed money to finance the company.
Debt ratio = $36,500,000 / $50,000,000 = 0.73 or 73%
2. The Firms debt equity ratio is 1.48, which is also higher than the industry average of 1.07.
Debt equity ratio =