Principles of Managerial Finance

CHAPTER 1 The Role and Environment of Managerial Finance 37

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b. Plot the marginal tax rates (measured on the yaxis) against the pretax

income levels (measured on the xaxis). Explain the relationship between

these variables.

1–8 Interest versus dividend income During the year just ended, Shering

Distributors, Inc., had pretax earnings from operations of $490,000. In addi-

tion, during the year it received $20,000 in income from interest on bonds it

held in Zig Manufacturing and received $20,000 in income from dividends on

its 5% common stock holding in Tank Industries, Inc. Shering is in the 40%

tax bracket and is eligible for a 70% dividend exclusion on its Tank Industries

stock.

a. Calculate the firm’s tax on its operating earnings only.

b. Find the tax and the after-tax amount attributable to the interest income

from Zig Manufacturing bonds.

c. Find the tax and the after-tax amount attributable to the dividend income

from the Tank Industries, Inc., common stock.

d. Compare, contrast, and discuss the after-tax amounts resulting from the

interest income and dividend income calculated in parts band c.

e. What is the firm’s total tax liability for the year?

1–9 Interest versus dividend expense Michaels Corporation expects earnings before

interest and taxes to be $40,000 for this period. Assuming an ordinary tax rate

of 40%, compute the firm’s earnings after taxes and earnings available for com-

mon stockholders (earnings after taxes and preferred stock dividends, if any)

under the following conditions:

a. The firm pays $10,000 in interest.

b. The firm pays $10,000 in preferred stock dividends.

1–10 Capital gains taxes Perkins Manufacturing is considering the sale of two non-

depreciable assets, X and Y. Asset X was purchased for $2,000 and will be sold

today for $2,250. Asset Y was purchased for $30,000 and will be sold today for

$35,000. The firm is subject to a 40% tax rate on capital gains.

a. Calculate the amount of capital gain, if any, realized on each of the assets.

b. Calculate the tax on the sale of each asset.

1–11 Capital gains taxes The following table contains purchase and sale prices for

the nondepreciable capital assets of a major corporation. The firm paid taxes of

40% on capital gains.

a. Determine the amount of capital gain realized on each of the five assets.

b. Calculate the amount of tax paid on each of the assets.

Asset Purchase price Sale price

A $ 3,000 $ 3,400

B 12,000 12,000

C 62,000 80,000

D 41,000 45,000

E 16,500 18,000