Grantham University

Final Exam

Chapter 2

Problem 2-4, Pearson Brothers recently reported an EBITDA (Earnings before interest, taxes, depreciation, and amortization) of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization? (income statement)

The taxable income would be 7.5 less 2 million less depreciation and amortization. $5.5m - $1.8m is the total available to pay taxes and depreciation. $370,000 to pay depreciation and taxes.
3.7-Depreciation =(5.5-Depreciation)*40% 3.7-2.5=(5.5-2.5)*40% (2.0)*40%=1.2
$2,500.000 Depreciation & Amortization

Problem 2-7, The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of
$15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s income tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income? (Corporate Tax Liability)

Income $365,000
Less Interest deduction (50,000)
Plus: Dividends received 4,500
Taxable income $319,500
70% of dividends received are excluded from taxes = $15,000(1 - 0.70) = $4,500

Tax = $22,250 + ($319,500 - $100,000)*0.39
Tax= $22,250 + $85,605 = $107,855

Marginal tax rate is 39 percent
Average tax rate is $107,855/$319,500 = 33.76%.

Chapter 3

Problem 3-8, Assume you are given the following relationships for the Clayton Corporation:
Sales/total assets 1.5
Return on assets (ROA) 3%
Return on equity (ROE) 5%
Calculate Clayton’s profit margin and debt ratio. (Profit Margin and Debt Ratio)
Return on assets = Profit margin x Assets turnover .03 = profit margin x 1.5
.03/1.5 = .02