1. Before-Tax/After-Tax Rates
a. An investor, Terry Noirs, is in the 40% tax bracket and has been contemplating investing in corporate bonds. After a recent stay at the Eiffel Payne Hospital, a not-for-profit hospital, he learned that they will be issuing tax-exempt bonds for a major expansion. The taxable corporate bonds of the same risk pay 8% interest. What is the minimum rate Eiffel Payne can set for the bonds for Terry to invest in the bonds?
b. Now after a few years, Terry retired and is in a 20% tax bracket. He had invested in the hospital bonds at 5%, but is wondering if he might be better holding the corporate bonds that are still earning 8%. After a recent stay at the Eiffel Payne Hospital, a not-for-profit hospital, he learned that they will be issuing tax-exempt bonds for a major expansion. The taxable corporate bonds of the same risk pay 8% interest. What is the minimum rate the taxable corporate bonds can pay for Terry to benefit by switching to them?
2. Intensive Care Urology Practice (ICUP), a not-for-profit business, had revenues in 2015 of $144,000. Expenses other than depreciation were 75% of revenues and Depreciation was $15,000. All revenues were collected in cash, and all expenses, excluding depreciation, were paid in cash during the year. No other assets were purchased, and no money was borrowed.
A. Construct ICUP’s Income Statement.
B. What was ICUP’s Cash Flow for the year?
C. If (under GAAP) PU changed its depreciation method so that the Depreciation Expense tripled to $45,000, what would be the new Net Income?
D. Again, if (under GAAP) ICUP changed its depreciation method so that the Depreciation Expense tripled to $45,000, what would be the Cash Flow?
E. Comment on the results.
3. The following are account balances on December 31, 2015 for Intensive Care Urology Practice (ICUP), (in alphabetical order):
Accounts Payable $ 90,000
Accounts Receivable, Net $120,000
Cash $ 48,000
Equity (January 1, 2015) $352,000
Expenses (includes taxes) $123,000
Inventory $182,000
Long-term Debt $210,000
Long-term Investments $ 60,000
Net Property & Equipment $263,000
Revenues $144,000
Create I.C. Optometry’s Balance Sheet (Hint: Not all of the accounts above are balance sheet accounts - you may need to calculate I.C.’s income!).