The Federal Income Tax System 1.) Talbot Enterprises recently reported an EBITDA

Question

The Federal Income Tax System

1.) Talbot Enterprises recently reported an EBITDA of $9.0 million and net income of $1.8 million. It had $2.79 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

2.) Kendall Corners Inc. recently reported net income of $4.3 million and depreciation of $645,000. What was its net cash flow? Assume it had no amortization expense. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

3.)Corporate bonds issued by Johnson Corporation currently yield 9%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds? Round your answer to two decimal places.

Explanation / Answer

1) Computation of depreciation and amortization:

2. Net cash flow = Net income + depeciation expense = $ 4,300,000 + $ 645,000 = $ 4,945,000.

3. Let the tax rate be T.

9% ( 1-T) = 6% or

9% - 9%T = 6% or

T = 3% / 9% = 33.33%

$ EBITDA 9,000,000 Depreciation and amortization expense 3,210,000 EBIT 5,790,000 Interest expense 2,790,000 EBT 3,000,000 Tax @ 40% 1,200,000 Net income 1,800,000

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