14-20 What tax years are available to corporations? How do the options differ from other forms of business organizations? Solution Upon establishing a new corporation, the corporation may choose either a calendar year or a fiscal year. They may choose either of the two regardless of the tax years of its owners which creates tax savings. This differs from other forms of business organizations, S corporations are required to use the calendar year unless they can establish a business purpose to use a fiscal year.
Which one of the following is least apt to help convince managers to work in the best interest of the stockholders?pay raises based on length of service • implementation of a stock option plan • threat of a proxy fight • management compensation tied to the market value of the firm’s stock • threat of a takeover of the firm by unsatisfied stockholders 5. a. Compute the future value of $2,000 compounded annually for 20 years at 4 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Future value $_________ b. Compute the future value of $2,000 compounded annually for 15 years at 10 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Future value $_________ c. Compute the future value of $2,000 compounded annually for 25 years at 4
14-24. The purpose of the dividends received deduction is to reduce the amount of taxable events when a company earns a profit and pays dividends to shareholders. The dividends that qualify for this deduction are those paid out of the corporate earnings by domestic corporations subject to the US corporate income tax. 14-51. The purpose of the reconciliation of taxable income with book income would be to establish ascertain temporary and permanent differences.
3) A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a A. credit to Accumulated Depreciation 4) Presenting consolidated financial statements this year when statements of individual companies were presented last year is an accounting change that should be reported by restating the financial statements of all prior periods presented. 13) If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information EXCEPT: the number of financing institutions that refused to refinance the debt, if any 14) Stock dividends distributable should be classified on the balance sheet as an item of stockholders' equity. 15) Which of the following items is a current liability? A long-term debt maturing currently, which is to be paid with cash in a sinking fund b.
2. What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing? Underpricing refers to the fact that, on average, underwriters pick the IPO issue price so that the average first-day return is positive. If you followed a strategy of placing an order for a fixed number of shares on every IPO, your order will be completely filled when the stock price goes down, but you will be rationed when it goes up.
• They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. • At maturity of the bond, the investor receives the market price of the bond. • They are obligations from the investor to the corporation. • Their interest rate always varies with the Consumer Price Index 6. Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%.
The Weighted Average Cost of Capital is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation.
Week 5 Assignment Questions 14-24 What is the purpose of the dividends-received deduction? What corporations are entitled to claim this deduction? What dividends qualify for this deduction? The purpose of the dividends received deduction is so that corporations would not be taxed at a corporate level a shareholder level or if when dividends or a recipient corporation. The dividends qualifying for the dividends-received deduction are those dividends paid by domestic corporations subject to the corporate income tax.
a stock purchase has no effect on the tax basis of the Company’s assets. Instead, he will be taking a stepped up basis in the stock purchased equal to the amount he pays for the stock, and the taxable income inherent in the Company’s assets remains inherent in the assets. Johnsons Services is already showing losses. While issuing debts in JS may give a rise to debt to equity ratio, the company should be careful in considering equity financing not to trigger an ownership change under Section 382 which may lead to limitations of using NOLs. Also, with even higher liabilities, it may be difficult to meet the debt service agreements if the company doesn’t have enough cash flow from operations.
Advantages and Disadvantages of Issuing Preferred Stock vs. Bonds Stock is a share of ownership in a company, sold by the company to its investors. “A bond is a form of an interest-bearing note…..requires periodic interest payments with the face amount to be repaid at the maturity date.” Both stock and bonds come in different classes: common and preferred stock, convertible, term, serial, callable and debenture bonds. Preferred stock, as defined by the Financial Accounting textbook, is “one or more classes of stock with various preference rights such as a preference to dividends.” Dividends are “distributions of a corporation’s earnings to stockholders.” These dividend rights are shown as a dollar amount per share or a percentage of par (Warren/Reeve/Duchac, 2012). There are several advantages and disadvantages to issuing preferred stock. A couple of the advantages to preferred stock are fixed rate of dividends and no voting rights.