Assignment:
1. D&D, Inc. reported the following results for 2007. Calculate D&D's taxable income and resulting tax liability using the tax rates given.
Sales 20,000,000
Cost of sales 8,000,000
Operating expenses 1,000,000
Depreciation expense 500,000
Interest expense 1,500,000
Common stock dividends paid 500,000
Dividends received from Corporation Z (D&D owns 10% of Corporation Z) 100,000
Corporate Tax Rates Taxable Income
15% $0 - $50,000
25% $50,001 - $75,000
34% $75,001 - $10,000,000
35% over $10,000,000
Additional surtax of 5% on income between $100,000 and $335,000
Additional surtax of 3% on income between $15,000,000 and $18,333,333
2. Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond. Assume a liquidity premium of 6 basis points. Identify as part of your answer the inflation risk premium, the default risk premium, the maturity premium, and the liquidity premium.
3-month T-bills 4.0%
30-year Treasury Bonds 6.0%
AA-rated Corp. Bonds 8.0%
Inflation Rate 2.5%
3. Explain what has led to the era of the multinational corporation.
4. In some countries, the expropriation (seizure) of foreign investments is a common practice. If you were considering an investment in one of those countries, would the use of the payback period criterion seem more reasonable than it otherwise might? Why or why not?
5. Firms often involve themselves in projects that do not result directly in profits. For example, IBM and ExxonMobil frequently support public television broadcasts. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not?