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# Tax Liability and Ratios

Please see the attached file.
1.) Suppose the following data holds:
In 2004, John and Marcy owned a small business which was held as a proprietorship in Marcy's name. They were thinking of incorporating if that would lower their total tax liability. They expected the company to earn \$120,000 before next taxes next year. They planned to take out a salary of \$50,000, and to reinvest the rest in the business. Their personal deductions total \$20,000, and if they choose not to incorporate they will file a joint return. (See the tables below.)
Individual Tax rates for 2004 -- Married Taxpayers Filing Joint Returns
Taxable Income Bracket Base Tax Amount Plus This Percent of the Amount Over
\$ 0 - \$ 14,300 \$ 0.00 + 10% \$ 0
14,301 - 58,100 1,430.00 15% 14,300
58,101 - 117,250 8,000.00 25% 58,100
Corporate Tax rates for 2004
Taxable Income Bracket Base Tax Amount Plus This Percent of the Amount Over
\$ 0 - \$ 50,000 \$ 0.00 + 15% \$ 0
50,001 - 75,000 7,500.00 25% 50,000
75,001 - 100,000 13,750.00 34% 75,000

What was their expected total tax liability as a proprietorship?
If the firm was incorporated, what was the expected tax liability as a corporation?
If the firm was incorporated, what was the expected tax liability of at personal level?

2.) Suppose the following data: (Use a 360-day year.)
Balance Sheet
Cash & M/S 20,000 Accruals 30,000
Receivables 50,000 Accounts Payable 40,000
Inventories 80,000 Notes Payable 50,000
Fixed Assets 350,000 L-T Liabilities 100,000
Common Equity 280,000
Total Assets 500,000 Total 500,000

Annual Sales = \$1,500,000 Cost of Goods Sold = \$1,200,000
Net Income = \$60,000 Number of Shares Outstanding = 20,000
Stock price = \$60
What is the current ratio of the firm?
What is the return on equity?
What is the total asset turnover ratio of the firm?
What is the inventory turnover ratio of the firm?
What is the P/E multiple?
What is the EPS (earnings per share)?
What is the days sales outstanding (DSO) of the firm?
What is the debt ratio of the firm?
What is the profit margin of the firm?

#### Solution Summary

The solution explains two questions - one dealing with tax liability and other relating to calculation of ratios

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