Fin214 Spring 2016 Homework Chapter 1-2

1. A corporate bond pays 8.5% yield to maturity (YTM, the official term for the return rate of bonds). You, as an investor, are in the 27% personal tax rate bracket. What is your after-tax yield (return rate) on this bond?

2. GE corporate bond pays 9.25% yield to maturity (YTM). How much yield would a MA municipal bond have to pay to be equivalent to the GE bond on an after-tax basis if you have a 25% personal income tax rate?

3. Massachusetts government issued a municipal bond with 5% yield to maturity (YTM). If you are in the 30% personal tax rate bracket, what return rate does a Six Flags corporate bond need to offer in order to compete with the MA municipal bond?

4. You are comparing a corporate bond with 8.5% yield to maturity (YTM) and a municipal bond with a 5.5% yield to maturity (YTM). At what income tax rate would you be indifferent between these two bonds? (i.e. they offer the same after-tax YTM)

5. General Motor has the following information in its balance sheet as for 12/31/2015.

Current Assets: $800,000 Current Liability: $650,000

Long-Term Debt: $350,000 Preferred Stock: $50,000

Common Stock: $500,000

How much would be the Fixed Assets figure if that is the only other item in the balance sheet? How much is the Net Working Capital?

6. Google has the following information in its income statement as for year 2015.

Sales: $350,000 Cost of Goods Sold: $150,000

Expenses: $80,000 Interest: $20,000

Average Tax Rate: 33%

Following the sequence of Income Statement deduction, how much is EBIT (earnings before interest and tax)? How much is Net Income?

7. Given the following 2015 Corporate Tax Rate Table:

Taxable income over Not over Tax rate

$ 0 $ 50,000 15%

50,000 75,000 25%

75,000 100,000 34%

100,000 335,000 39%

335,000 10,000,000 34%

10,000,000 15,000,000 35%

15,000,000 18,333,333 38%

18,333,333 .......... 35%

If Microsoft had a taxable income of $380,000 in 2015, then what is the marginal tax rate? What will be the dollar amount of its tax bill? What is the average tax rate?