2-6 – Statement of Retained Earnings 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 dividends was paid to shareholders during the year? Net Income = 50 million Retained Earnings = 810 million Retained Earnings beginning of the year = 780 million Amount of RE generated this year = 810 – 780 = 30 million NI = Dividends + RE 50 million = Dividends + 30 million Dividends= 50 – 30 = 20 million 2-7 – Corporate tax liability

The Talley Corporation had a taxable income of \$365,000 from operations after all operating costs but before (1) interest charges of \$50000 (2) dividends received of \$15,000 (3) dividends paid of \$25000 and (4) income taxes. What are the firms income tax liability and its after tax income? What are the company’s marginal and average tax rates on taxable income? Income \$365,000 Less Interest deduction (50,000) Plus: Dividends received 4,500 Taxable income \$319,500 For a corporation, 70% of dividends received are excluded from taxes; therefore, taxable dividends are calculated as \$15,000(1 – 0. 0) = \$4,500. Tax = \$22,250 + (\$319,500 – \$100,000) (0. 39) = \$22,250 +\$85,605 = \$107,855 After-tax income: Taxable income \$319,500 Taxes (107,855) Plus: Non-taxable dividends received 10,500 Net income \$222,145 Non-taxable dividends are calculated as \$15,000 ? 0. 7 = \$10,500. The company’s marginal tax rate is 39%. The company’s average tax rate is \$107,855/\$319,500 = 33. 76% 2-9 – Corporate after tax yield The Shrieves Corporation has \$10,000 that it plans to invest in marketable securities. It is choosing among ATT bonds, which yield 7. %, state of Florida muni bonds, which yield 5% (but not taxable), and ATT preferred stock, which a dividend yield of 6%. Shrieves corporate tax rate is 35% and 70% of the dividends are tax exempt. Find the after tax rates of return on all three securities. ATT yield on FLA bond = 5%. ATT yield on AT&T bond = 7. 5% – Taxes = = 7. 5% – 7. 5 %( 0. 35) = 7. 5% (1 – 0. 35) =4. 875%. ATT yield on AT&T preferred stock: AT yield = 6% – Taxes = = 6% – (0. 3) (6%)(0. 35) = 6% – 0. 63% = 5. 37%. Investing in ATT preferred stock.