Archive for category: Finance

The basic concepts of financial management are the same for all businesses, regardless of how they are organized. However, a firm’s legal structure affects its operations. The main forms of business organizations are: (1) proprietorships, (2) partnerships, (3) corporations, and (4) limited liability companies (LLCs) and limited liability partnerships (LLPs). In terms of numbers, most businesses are  -Select- proprietorships partnerships corporations limited liability companies/partnerships Item 1  . However, based on the dollar value of sales, most business is done by  -Select- proprietorships partnerships corporations limited liability companies/partnerships Item 2  . Businesses are frequently started as  -Select- corporations partnerships proprietorships limited liability companies/partnerships Item 3  and then converted to  -Select- corporations partnerships proprietorships limited liability companies/partnerships Item 4  when their growth results in disadvantages outweighing advantages.
A proprietorship has three important advantages: (1) It is easily and inexpensively formed, (2) it is subject to  -Select- no few many Item 5  government regulations, and (3) it is subject to lower income taxes than are  -Select- partnerships corporations Item 6  . However, a proprietorship also has three important limitations: (1) A proprietor has  -Select- unlimited limited no Item 7  personal liability for the business’ debts. (2) The life of the business is limited to the life of the individual who created it. (3) A proprietorship has difficulty obtaining large sums of capital so proprietorships are used primarily for small businesses.
A partnership has two important advantages: (1) It is easily and inexpensively formed and (2) its income is allocated on a pro rata basis to partners and taxed on a(n)  -Select- individual corporate Item 8  basis so the partnership avoids higher  -Select- individual corporate Item 9  income taxes. A partnership has four important disadvantages: (1)  -Select- Unlimited Limited Item 10  personal liability, (2)  -Select- unlimited limited Item 11  life, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital.
A corporation has the following advantages: (1)  -Select- Unlimited Limited Item 12  life, (2) ownership that is easily transferred through the exchange of stock, (3)  -Select- unlimited limited Item 13  liability, and (4) can  -Select- difficultly easily Item 14  raise large amounts of capital to operate large businesses. Its disadvantages are: (1) Corporate earnings may be subject to  -Select- triple double no Item 15  taxation and (2) setting up a corporation and filing required state and federal reports, which is more complex and time-consuming. Large corporations are known as C corporations. However, as an aid to small businesses Congress created S corporations.
Limited liability companies (LLCs) and limited liability partnerships (LLPs) have limited liability protection like  -Select- partnerships corporations Item 16  but are taxed like  -Select- partnerships corporations Item 17  . Investors in an LLC or LLP have votes in proportion to their ownership interest. LLCs and LLPs have been gaining in popularity, but large companies still find it advantageous to be  -Select- S C Item 18  corporations because of advantages in raising capital for growth.

The Talley Corporation had taxable operating income of $345,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $70,000, (2) dividends received of $20,000, and (3) dividends paid of $35,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt.

What is the firm’s taxable income? Round your answer to the nearest dollar.

$

What is the tax expense? Round your answers to the nearest dollar.

$

What is the after-tax income? Round your answers to the nearest dollar.

$

The Wendt Corporation reported $40 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes).

1. What is the company’s federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

$

1. Assume the firm receives an additional $2 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

$

1. Now assume that Wendt does not receive the interest income but does receive an additional $2 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

$

Rhodes Corporation’s financial statements are shown below.

Rhodes Corporation: Income Statements for Year Ending December 31
(Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.

$   million

1. What are the amounts of net operating working capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.

2020: $   million

2019: $   million

1. What are the amounts of total net operating capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.

2020: $   million

2019: $   million

1. What is the free cash flow for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number.

$    million

1. What is the ROIC for 2020? Round your answer to two decimal places.

%

1. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.