Repurchase of stock 11 Cash to stockholders $ 92 Proceeds from new stock issue –43 Total $ 49 Net capital spending = NFAend NFAbeg + Depreciation 25. – = (NFAend NFAbeg) + (Depreciation + ADbeg) ADbeg – – = (NFAend NFAbeg)+ ADend ADbeg – – = (NFAend + ADend) (NFAbeg + ADbeg) = FAend FAbeg – – 26. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the a. tax advantage of low marginal rates for high income corporations. Assuming a taxable income of $335,000, the will be: b. Taxes = .15($50K) + .25($25K) + .34($25K) + .39($235K) = $113.9K Average tax rate = $113.9K / $335K = 34% The marginal tax rate on the next dollar of income is 34 percent. For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates. Taxes = .34($10M) + .35($5M) + .38($3.333M) = $6,416,667 Average tax rate = $6,416,667 / $18,333,334 = 35% The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates. Taxes = .34($200K) = $68K = .15($50K) + .25($25K) + .34($25K) + X($100K); c. X($100K) = $68K 22.25K = $45.75K – X = $45.75K / $100K X = .4575, or 45.75%
Repurchase of stock 11 Cash to stockholders $ 92 Proceeds from new stock issue –43 Total $ 49 25. Net capital spending = NFAend – NFAbeg + Depreciation = (NFAend – NFAbeg) + (Depreciation + ADbeg) – ADbeg = (NFAend – NFAbeg)+ ADend – ADbeg = (NFAend + ADend) – (NFAbeg + ADbeg) = FAend – FAbeg 26. a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b. Assuming a taxable income of $335,000, the will be: Taxes = .15($50K) + .25($25K) + .34($25K) + .39($235K) = $113.9K Average tax rate = $113.9K / $335K = 34% The marginal tax rate on the next dollar of income is 34 percent. For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates. Taxes = .34($10M) + .35($5M) + .38($3.333M) = $6,416,667 Average tax rate = $6,416,667 / $18,333,334 = 35% The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates. c. Taxes = .34($200K) = $68K = .15($50K) + .25($25K) + .34($25K) + X($100K); X($100K) = $68K – 22.25K = $45.75K X = $45.75K / $100K X = .4575, or 45.75%
solution-manual-corporate-finance-11th-edition-ross.docx