3-1 Solutions to Chapter 3 Accounting and Finance 1. Sophie's ...

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Chapter 03 - Accounting and Finance5. a. Taxes = (0.10 $8,500) + 0.15 ($20,000 $8,500) = $2,575Average tax rate = $2,575/$20,000 = 0.12875 = 12.88%Marginal tax rate = 15%b. Taxes = (0.10 $8,500) + 0.15 ($34,500 $8,500) + 0.25 ($50,000 $34,500)= $8,625Average tax rate = $8,625/$50,000 = 0.1725 = 17.25%Marginal tax rate = 25%c. Taxes = (0.10 $8,500) + 0.15 ($34,500 $8,500) + 0.25 ($83,600 $34,500)+ 0.28 ($174,400 $83,600) + 0.33 ($300,000 $174,400) = $83,897Average tax rate = $83,897/$300,000 = 0.279657 = 27.97%Marginal tax rate = 33%d. Taxes = (0.10 $8,500) + 0.15 ($34,500 $8,500) + 0.25 ($83,600 $34,500)+ 0.28 ($174,400 $83,600) + 0.33 ($379,150 $174,400)+ 0.35 ($3,000,000 – $379,150) = $1,027,314Est time: 06–10Average tax rate = $1,027,314/$3,000,000 = 0.342438 = 34.24%Marginal tax rate = 35%6. Taxes = (0.15 $50,000) + 0.25 ($75,000 $50,000) + 0.34 ($100,000 $75,000)= $22,250Average tax rate = $22,250/$100,000 = 0.2225 = 22.25%Marginal tax rate = 34%Est time: 01–057. Taxes = (0.10 $17,000) + 0.15 ($69,000 $17,000) + 0.25 ($95,000 $69,000)= $16,000Average tax rate = $16,000/$95,000 = 0.168421 = 16.84%Marginal tax rate = 25%Est time: 01–053-2
Chapter 03 - Accounting and Finance8. a. Cash will increase as one current asset (inventory) is exchanged for another (cash).b. Cash will increase. The machine will bring in cash when it is sold, but the leasepayments will be made over several years.c. The firm will use cash to buy back the shares from existing shareholders. Cashbalance will decrease.Est time: 01–059. a. The fact that start-up firms typically have negative net cash flows for several yearsdoes not mean they are failing. Start-up firms invest in inventories and other assetsdesigned to produce income in later periods.b. Accounting profits for start-up businesses are also commonly negative because thesefirms incur costs, such as advertising, that cannot be recorded on the balance sheet.These costs are general administrative expenses the firm incurs in each period, notinvestments like those in inventories that are built up for future sales.Est time: 06–1010. a. In early 2010 investors saw the value of assets on the books of these banks as worthless than the value recorded, which may be historical value. Loans are the primaryassets for banks, and investors perceived a high likelihood that the loans these banksmade would default. If so, the banks would need to write down their values, reducingincome available to shareholders.b. In contrast to the banks, investors perceived the assets of this company to be worthmore than the historical value presented on the company’s book. Consistent with theanalysis in part (a), shareholders in this company are expecting to have higher incomein future periods, and the value of the company’s assets are expected to grow.Est time: 01–053-3
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