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Tax Liability and Marginal Tax Rate

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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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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

See Also This Related BrainMass Solution

New Hope's Tax Liability and Marginal Tax Rates

Problem 1

New Hope Managed Care Inc., is a for-profit managed care company that serves the southwest United States. Last year, it reported $1,200,000 in income from operations, $250,000 in interest income from bonds it bought in the previous year, and $60,000 in dividend income from shares in a large drug company. New Hope also has $200,000 in surplus funds that it is considering investing in bonds that pay interest of $10,000 per year or stock that pays dividends of $9,000 per year.

a. What is New Hope's tax liability?
b. What is New Hope's marginal tax rate? Average tax rate?
c. Should New Hope invest its surplus funds in bonds or stock?

Problem 2

Johnson Family Care Inc. is a large ambulatory care center that provides comprehensive 24-hourprimary and specialty care to a large suburban population in Pennsylvania. The center recently purchased new clinical laboratory equipment for $1.1 million and spent $22,000 to renovate a center room to accommodate the new equipment. The useful life of the equipment is estimated to be ten years, after which it can be sold for $75,000. Johnson uses a straight-line method to calculate book depreciation and pays tax at a rate of 40 percent. The equipment falls into the MACRS seven-year class.

a. What annual depreciation expense will be reported on the income statement for the center?
b. What annual depreciation expense will be reported for tax purposes?
c. Suppose Johnson sells the laboratory equipment at the end of Year 4 for $400,000. What impact would this have on the taxes paid by the center?

Chap 4, Problem 1

Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:
State of the Probability Rate of Economy of Occurrence Return

Very Poor 0.1 -10%
Poor 0.2 0%
Average 0.4 10%
Good 0.2 20%
Very Good 0.1 30%

a. What is the expected rate of return on the project?
b. What is the project's standard deviation of returns?
c. What is the project's coefficient of variation (CV) of returns?
d. What type of risk does the standard deviation and CV measure?
e. In what situation is this risk relevant?

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