Data Need To Be Answered In Excel Workbook In Its Most ✓ Solved

DATA. NEED TO BE ANSWERED IN Excel Work BOOK In its most

In its most recent financial statements, Del-Castillo Inc. reported $70 million of net income and $900 million of retained earnings. The previous retained earnings were $855 million. How much in dividends did the firm pay to shareholders during the year?

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 is the firm’s taxable income? What is its marginal tax rate? What is its tax expense? What is its after-tax income? What is the average tax rate based on taxable income?

The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. The corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

Paper For Above Instructions

The analysis of Del-Castillo Inc.'s financial data begins with understanding retained earnings. Retained earnings are the cumulative amount of net income that a company retains, rather than distributing it as dividends. To determine the dividends paid by Del-Castillo Inc. during the year, one can use the formula:

Dividends Paid = Previous Retained Earnings + Net Income - Current Retained Earnings.

Substituting the values from Del-Castillo Inc.:

Dividends Paid = $855 million + $70 million - $900 million = $25 million.

Therefore, Del-Castillo Inc. paid $25 million in dividends to shareholders during the year.

Now, addressing the Talley Corporation's situation, taxable income considerations must take into account various adjustments. The taxable income reported is $365,000 from operations. To find the actual taxable income, we must add back the interest charges because they are tax-deductible:

Taxable income = Reported taxable income + Interest charges.

Thus, the taxable income for Talley Corporation is:

Taxable Income = $365,000 + $50,000 = $415,000.

Next, we must determine the marginal tax rate and calculate tax expense. The marginal tax rate is usually inferred from brackets; however, we simplify this scenario by assuming a consistent tax rate, which we often take as 21%, though this can vary based on specific financial details. The tax expense is calculated as follows:

Tax Expense = Taxable Income × Tax Rate. Extrapolating from the example:

Tax Expense = $415,000 × 0.21 = $87,150.

To calculate the after-tax income, we subtract the tax expense from the taxable income:

After-Tax Income = Taxable Income - Tax Expense = $415,000 - $87,150 = $327,850.

Next, we need to scrutinize the average tax rate, calculated by dividing the tax expense by the taxable income:

Average Tax Rate = Tax Expense / Taxable Income = $87,150 / $415,000 ≈ 0.21 or 21%.

Now, let's analyze the investment options for the Shrieves Corporation. The three potential investments yield various after-tax returns:

Investment Analysis

1. AT&T Bonds: These bonds yield 7.5%. The after-tax yield can be calculated as:

After-Tax Yield = Yield × (1 - Corporate Tax Rate) = 7.5% × (1 - 0.35) = 7.5% × 0.65 ≈ 4.875%.

2. Florida Muni Bonds: These bonds yield 5%, which is tax-exempt, hence their return remains:

After-Tax Yield = 5%.

3. AT&T Preferred Stock: With a dividend yield of 6%, only 30% is taxable:

Taxable Dividend = 6% × 0.30 = 1.8% taxable. Therefore, the after-tax yield is:

After-Tax Yield = 6% × (1 - 0.35 × 0.30) = 6% × (1 - 0.105) = 6% × 0.895 ≈ 5.37%.

To summarize:

  • After-Tax Yield on AT&T Bonds: 4.875%
  • After-Tax Yield on Florida Muni Bonds: 5%
  • After-Tax Yield on AT&T Preferred Stock: 5.37%

Conclusion

Based on the above calculations, Del-Castillo Inc. paid $25 million in dividends, Talley Corporation’s taxable income is $415,000 with a tax expense of $87,150, leading to an after-tax income of $327,850. Regarding investment opportunities, the after-tax yields showed varying returns, with Florida Muni Bonds providing a competitive yield. Each investment choice should align with the firm’s risk profile and tax considerations.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Graham, J. R., & Harvey, C. R. (2020). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill/Irwin.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Mintz, J. M., & Weichenrieder, A. J. (2010). The Effect of Taxes on Corporate Financial Policy: Evidence from the German Corporate Tax Reform. European Economic Review.
  • Scholes, M., Wilson, G., & Wolfson, M. (2016). Taxes and Business Strategy: A Planning Approach. Pearson.
  • Reilly, F. K., & Brown, K. C. (2018). Investment Analysis and Portfolio Management. Cengage Learning.
  • Stice, E. K., & Stice, J. D. (2019). Financial Accounting. Cengage Learning.
  • Weston, J. F., & Copeland, T. E. (2010). Managerial Finance. Cengage Learning.

Related Assignments