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Sandersen Inc Sells Minicomputers

Sandersen Inc Sells Minicomputers

Answer all the questions,

 Question: 1

a). Sandersen Inc sells minicomputers. The firm’s taxable income is $1,225,000. Calculate the corporation’s tax liability.

Corporate Tax Rates
15% $ 0–$50,000
25% $ 50,001–$75,000
34% $75,001–$10,000,000
35% over $10,000,000
Additional surtax:
•5% on income between $100,000 and $335,000.
•3% on income between $15,000,000 and $18,333,333.

Corporation tax liability is a legal obligation held by a company to pay a specific amount of tax as a fraction of its annual income. The corporation tax due is usually based on a specified percentage of a firm’s annual incomes. Businesses pay corporation tax on all their trading activities like property rentals, savings deposits, and sale of property (Vernimmen, Quiry, Dallocchio, Le Fur & Salvi, 2014). Surtaxes are additional taxes charged on top of other taxes. The tax may be computed as a proportion of a specific amount, or it can be a pre-set dollar amount.  The corporation tax for Sandersen, Inc. has been computed in the first part of this question. Governments impose taxes on citizens to help them fulfill several objectives as discussed in the second part of this question.

a). Sandersen, Inc.’s Tax Liability

50000 × 15% = 7500

(75000-50000) × 25% = 6250

(1225000 -75000) × 34% = 391000

7500+6250+391000 = 404750

Additional Surtaxes

5% on income between $100,000 and $335,000.
(335000-100000) × 5% = 11750
Total Tax Liability = 404750 + 11750 = 416500

b). “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.

Originally the sole objective of taxation was to generate government revenue. Although the objective is important, economic and social objectives have also been added. Some social objectives of taxation include the achievement of socially desirable objectives like financing health programs providing social security and educational programs. Some economic objectives of taxation include the provision of revenues for government expenses and economic stabilization (Vernimmen, Quiry, Dallocchio, Le Fur & Salvi, 2014). Through taxation, the government can maintain economic stability by distributing wealth equitably. The government should execute different welfare and development functions in the country. To accomplish this, the government needs large sums of money, which it collects through taxation.blankQuestion: 2                                                                                                   

a). Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?

Common Stock A Common Stock B
Probability Return Probability Return
.20 12% .10   4%
.50 18% .30   6%
.30 27% .40 10%
.20 15%

b). “ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?

Question 3:                                                                                               

a). J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.

Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year’s sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm’s balance sheet for the year just ended is found below:

  J and S Corporation
Balance Sheet
12/31/2000 % of Sales
Current assets $6,000,000 40%
Net fixed assets 9,000,000 60%
   Total $15,000,000
Liabilities and Owners’ Equity
Accounts payable $3,750,000 25%
Long-term debt 4,250,000 NAa
   Total liabilities $8,000,000
Common stock 2,000,000 NA
Paid-in capital 2,800,000 NA
Retained earnings 2,200,000
Common equity 7,000,000
   Total $15,000,000
aNot applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).

b). Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.

Question 4:

Using 3D Labs  Inc.’s financial statements shown on the following pages:

 

 

3D Labs Inc. Income Statement For Years Ending 12/31/2017
                       2017
Sales $1,450
Cost of goods sold 850
Gross profit $ 600
Operating expenses 40
Depreciation 200 240
Operating income $ 360
Interest expense 64
Net income before taxes $ 296
Taxes 118
Net income $ 178

 

 

 

3 D Labs  Inc. Balance Sheet At 12/31/2017
 

Assets

                   2017

Cash                                                                                               $ 150

Accounts receivable                                                                          425

Inventory                                                                        625

Current assets                                                                            $1,200

Plant and equipment                                                                     $2,600

Less: accumulated depreciation                                                  (1,200)

Net plant and equipments                                       $1,400

Total assets                                                                                $2,600

Liabilities and Owners’ Equity

                    2017

Accounts payable                                                                           $ 150

Notes payable                                                                                    150

Current liabilities                                                                         $ 300

Bonds                                                                                             $ 600 Owners’ equity

Common stock                                                                            $ 300

Paid in capital                                                                                 600

Retained earnings                                                                          800

Total owners’ equity                                                                  $1,700

Total liabilities and owners’ equity                                              $2,600

a). Calculate the following ratios.

INDUSTRY NORMS
Current ratio 1.5:1
Inventory turnover 3 x
Total asset turnover 1 x
Operating profit margin 18%
Operating income return on investment 18%
Debt ratio 60%
Average collection period 100 days
Fixed asset turnover 1.5
Return on equity 15%

Question 5:

a). X construction is considering two projects to develop. The estimated net cash flow from each project is as follows:

Project M Project N
Year 1 20,000 40,000
Year 2 25,000 35,000
Year 3 30,000 30,000
Year 4 35,000 25,000
Year 5 40,000 30,000

Each project requires an investment of $ 100000. A rate of 10% has been selected for the NPV analysis.

Require to

a). Calculate Payback period, ARR Net Present Value and Profitability Index.

b). Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest

Question 6:

Explain the financial Axioms

  1. Risk – return trade-off
  2. Time value of money
  3. Cash is king
  4. Incremental cash flows
  5. The agency problem
  6. Taxes bias business decisions
  7. All risk is not equal
  8. Ethical dilemmas are everywhere in finance
  9. The Curse of Competitive Markets
  10. Efficient Capital Markets

Question 7:    

“The finance department of an organization performs several functions in order to achieve the objectives.” The scope of finance function is very wide.- Discuss.                             

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