Problem 1: After Tax Returns
a. Lovell Co. purchased preferred stock in another company. The preferred stock’s before tax yield was 8.4 percent. The tax rate on corporate income is 40 percent. What is the after tax return on the preferred stock?
b. A bond issued by the State of Pennsylvania provides a 9 % yield. What yield on a Synthetic Chemical bond would cause the two bonds to provide the same after tax rate of return to an investor in the 36 percent tax bracket?
Problem 2: Corporate Income Tax
Griffey Communications has $125,000 of operating income. In addition, the company has interest income (all of it taxable) of $25,000, and it realized $70,000 in dividend income. The company’s interest expense was $40,000.
Taxable Income Tax Rate
Up to $50,000 15 %
$50,000 to $75,000 25 %
$75,000 to $100,000 34 %
$100,000 to $335,000 39 %
$335,000 t0 $10,000,000 34 %
Using the corporate tax schedule shown above, what is Griffey’s tax liability and earnings after tax?