Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 15: Capital Account, Debenture, Mutual Fund
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During the current year, Marlene, Nancy and Olive formed a new SCorporation. Solely in exchange for stock, Marlene and Nancycontributed appreciated property, while Olive contributed services.The exchanges of Marlene and Nancy will be nontaxable if:
Olive receives 30% of the stock | ||
Olive receives 80% of the stock | ||
Olive receives 15% of the stock | ||
Marlene and Nancy together receive 50% of the stock |
In June of 2018, Alice acquired heronly machine for $30,000 to use in her business. The machine isclassified as 5-year property. Aliceâs maximum depreciation(including bonus) on the machine this year is:
$30,000 | ||
$12,000 | ||
$6,000 | ||
$18,000 |
Cactus Corporation, an S Corporation, had accumulated earningsand profits of $200,000 at the beginning of the tax year. Tex andShirley each own 50% of the stock. During the current year Cactushad $100,000 of ordinary income and distributed $10,000 to Tex and$10,000 to Shirley. What is Tex's taxable income for the currentyear?
$10,000 | ||
$0 | ||
$100,000 | ||
$50,000 |
Bristol Corporation was formed as an S Corporation on January 1,2014 and elected S corporation status at that date. Bristol has hadthe same 25 shareholders throughout its existence and has one classof stock. Bristol's S election will terminate if it:
10% of the shareholders vote to revoke the election | ||
to purchase 10 shares | ||
Allows a variation in the voting rights of the stock | ||
Increases the number of shareholders to 125 |
On February 10, 2018, Ace Corporation, a new calendar yearcorporation, elected S corporation status and all shareholdersconsented to the election. There was no change in its shareholdersduring the current year. Ace met all eligibility requirements foran S corporation during the preelection portion of the year. Whatis the earliest date on which Ace can be recognized as an Scorporation?
February 10, 2018 | ||
January 1, 2019 | ||
February 10, 2019 | ||
January 1, 2018 |
In March of 2017 Frederick acquired an passenger automobile for$45,000 and used the automobile 85% for business. Themaximum depreciation deduction for 2017 is:
$3,160 | ||
$11,160 | ||
$8,928 | ||
$9,486 |
In August of 2017, Joseph acquires andplaces into services business equipment costing $300,000. Theequipment is classified as 5-year recovery property. No otheracquisitions are made during the year. Joseph elects to expense themaximum amount under Sec. 179. Josephâs total deductions for theyear are
$60,000 | ||
$500,000 | ||
$100,000 | ||
$300,000 |
For the current tax year, VBN, an S Corporation distributes$100,000 to its sole shareholder, Raymond. His basis in the stockwas $140,000 before the distribution. VBN had once been a regular CCorporation and had remaining accumulated earnings and profits(E&P) from those years of $70,000. However, VBN has no balancein its accumulated adjustment account. How should the distributionof $100,000 be handled?
$100,000 as a taxable distribution
$70,000 as a taxable dividend, and $30,000 has a non taxablereturn of capital
$50,000 as a taxable dividend, and $100,000 as a non taxablereturn of capital
$70,000 as a taxable dividend; and $30,000 as a capital gain
Stahl, an individual who owns 100% of Talon, an S corporation,had a basis of $50,000 at the first of the year. During the yearTalon reported the following: Ordinary Loss of $10,000; Municipalinterest income of $8,000, Long term capital gain of $4,000; andLong term capital loss of $9,000. What was Stahl's basis in Talonat year end?
$56,000 | ||
$65,000 | ||
$53,000 | ||
$43,000 |
Gross Receipts of $70,000; Tax Exempt Interest Income of $4,000;Dividends of $10,000; Supplies Expense of $3,000; and UtilitiesExpense of $1,500. What amount is the S Corporation's ordinarytaxable income?
$75,500 | ||
$79,500 | ||
$70,000 | ||
$65,500 |
Bob and Sam each owned 50% of Lostalot, an S Corporation. Bob'sbasis is $30,000 and Sam's basis is $15,000. The corporation hasoperating loss for the current year of $50,000. Howmuch loss can each shareholder deduct in the current year assumingthey materially participate in the business:
Bob: $25,000; Sam: $15,000 | ||
Bob: $0; Sam: $0 | ||
Bob: $25,000; Sam: $25,000 | ||
Bob: $30,000; Sam: $15,000 |
Terra Corporation, a calendar-yeartaxpayer, purchases and places into service in 2017 machinery witha 7-year life that cost $650,000. The mid-quarter convention doesnot apply. Terraâs taxable income for the year before the Sec. 179deduction is $700,000. What is Terraâs total maximum depreciationdeduction related to this property?
$585,718 | ||
$521,345 | ||
$92,885 | ||
$500,000 |
Identify which of the following statements is false.
The PTI (previously taxed income) represents the balance ofundistributed net income which were already taxed. | ||
The AAA balance can be negative, but the shareholder's basis inthe S corporation stock cannot be less than zero. | ||
Tax exempt income increase the AAA and the basis of the Scorporation stock. | ||
An S Corporation may or may not have accumulated Earnings andProfits Elaine owns an unincorporated manufacturing business. In 2017,she purchases and places in service $600,000 of qualifying fiveyear equipment for use in her business. Her taxable income from thebusiness before any section 179 deduction is $100,000. Which of thefollowing statements is true? |
Elaine cannot deduct any Section 179 deduction for 2017 | ||||||||||||||
Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $400,000 carryover to next year. | ||||||||||||||
Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $500,000 carryover to the next year | ||||||||||||||
Elaine can deduct $500,000 as a section 179 deduction in2017 Charles, an individual, owned 100% of the Alpha, an Scorporation. At the first of the year, Charles' basis in Alpha was$25,000. In the current year, Alpha realized ordinary income of$1,000; and a long term capital gain of $3,000. Alpha distributed$25,000 to Charles at the end of the year. What amount of the$25,000 is taxable to Charles?
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1a- What are the direct costs and indirect costs of financial distress, from default that leads to bankruptcy? Explain in a well-stated description and discussion, not over a page in length.
1b- What are the impacts of the following on BECA Corporation's value, given the following information? SHOW ALL CALCULATIONS, and make a summary about the impact on equity owners between leveraged and unleveraged capital structures, and the impact on firm value from Financial Distress Costs.
BECA Corporation faces an uncertain future in a challenging business environment. Due to increased competition from foreign imports, its revenues have fallen dramatically in the past year. BECA's managers hope that a new product in the company's pipeline of new products will restore its fortunes. While the new product represents a significant advance over BECA's competition, whether that product will be a hit with consumers remains uncertain. If it is a hit, revenues and profits will grow, and BECA will be worth $200 million at the end of the year. If it fails, BECA will be worth only $130 million at the end of the year.
BECA Corporation may employ one of two alternative capital structures at the beginning of the year to provide the funding for this new project: (1) it can use all equity financing or (2) it can use debt that matures at the end of the year with a total of $150 million due.
Look first at the consequences of these capital structures when the new product succeeds, and when the new product fails, in a setting of perfect capital markets. Calculate what the debt and equity values will be for success and for failure, in both the unlevered and levered capital structures, at the end of the year. Show the totals to all investors (debt + equity) as well.
Now, since it has been assumed that BECA Corporation is operating in a perfect capital market, according to the M&M Proposition I, the investors (debt and equity total) will NOT be worse off because BECA may have some leverage at the beginning of the year. In other words, the value of BECA will be the same whether it has incurred the $150M of debt or not.
So, you are to show if that is indeed the case for BECA Corporation, under the following scenario.
Suppose the risk-free rate is 5%, and BECA's new product is equally likely to succeed or to fail. For simplicity, suppose that BECA's cash flows are unrelated to the state of the economy (i.e., the risk is diversifiable), so that the project has a Beta coefficient of 0 and the cost of capital is the risk-free rate. Compute the value of BECA's securities (that means both debt and equity, as applicable) at the beginning of the year with and without the $150M debt, and show whether or not the M&M Proposition I holds. That is, show if the value of the securities with or without leverage (the debt of $150M) have the same total value or not.
Now, to "get at" the value, VL or VU of the BECA Corporation, you have to discount the value of the cash flows to investors, per equation 9.23 in Chapter 9. But, what you need to know about the M&M Propositions is they assumed that the entire earnings (EBIT) in each year are paid out to the shareholders in the form of dividends or to the debtholders in the form of interest. So, regardless, the owners of the firm receive all the cash flows. So, for equation 9.23, you only have one year of FCFs, and the discount rate is 5%. What is the FCF? Since it is all of the cash flows with no taxes existing, and all of it is paid out to the equity and debt holders in a perfect capital market, what you find out is that the numerator is nothing more than the equity or debt values you calculated above. This is illustrated in Example 16.1 on page 554 of the texbook (I just provided an explanation of why the equity and debt values are used in the numerator instead of cash flows...in this case, they are the same).
2.Suppose you are a rational investor and looking at the following tax rates:
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(The 2012 tax rates were revised in 2013 by the U.S. Congress, and signed into law by the President, but that is for information only). The tax rates shown are for financial assets held for one year or more. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
Your assignment: What is the effective dividend tax rate for a buy and hold individual investor in 2006 ?
Show all of your calculations.