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Tax Liability and Marginal Tax Rate

I need assistance in solving the two problems below:

1. Assume that a corporation has $100,000 of taxable income from operations plus $5,000 of interest income and $10,000 of dividend income. What is the company's tax liability?

2. Assume that you are in the 25% percent marginal tax bracket and that you have $5,000 to invest. You have narrowed your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?

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Solution Preview

1. Interest income is fully taxable and so would be added to the 100,000 of taxable income. Dividend income is tax exempt for 70% of the amount. For a dividend income of 10,000, 7,000 will not be taxable and 3,000 would be added to the taxable income. The taxable income is
Initial taxable income 100,000
Add: Interest income 5,000
Add: ...

Solution Summary

The solution explains how to calculate the tax liability and the marginal tax rate at which one would be indifferent between two investment opportunities