ASSIGNMENT WEEK 1

(2-6) Statement of Retained Earnings

2012

In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends was paid to shareholders during the year? Solution: New Balance Retained Earnings=Previous Balance Retained Earnings+ Net Income-Dividend Paid Dividend Paid=Previous Balance Retained Earnings+ Net Income- New Balance Retained Earings Dividend Paid=$780 Mills+ $50 Mills- $810 Mills Dividend Paid=$20 Millions

(2-9)

Corporate After-Tax Yield

The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrievess corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Solution:

Invest = $ 10,000 AT&T bonds = 7.5% AT&T preferred stock = 6 % State of Florida muni bonds = 5% Corporate tax rate = 35%
AT&T bond = 7.5% * 10000 = $ 750 Taxes = 750 * 0.35 = $ 262.50 $ 750 - 262.50 = $487.50 Yld AT&T bond = 487.50 / 10,000 = 0.04875 *100% = 4.875 % Yld AT&T bond = 4.875 % AT&T preferred stock = 6% * 10000 = 0.06 * 10000 = $600 Tax exemption 70% = 600 * 0.7 = $ 420 Taxable = $600 - $420 = $ 180 Taxes = $ 180 * 0.35 = $ 63 in taxes $ 600 - $ 63 = $ 537 Yield = 537 / 10000 = 0.0537 * 100% = 5.37% Yield AT&T preferred stock = 5.37 % State of Florida muni bonds = 5% Muni bonds =10000 * 0.05 = $500 There are not taxable, so no taxes deduction. Yield = $500 / 10000 = 0.05 * 100 % = 5 % Yield State of Florida muni bonds = 5%

Manjit Kaur

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