Question

1. Suppose your firm earns $2 million in taxable income.

i. What is the firm’s tax liability?

ii. What is the average tax rate?

iii. What is the marginal tax rate?

Taxable Income​ Tax Rate

0 and under 50,000​​​10%

50,000 and under 75,000​​20%

75,000 and under 100,000​​30%

100,000 and under 335,000​​40%

335,000 and under 4,000,000​​50%

2.​Suppose you have $20,000 to invest and you believe that you can earn 12 per year ​over the next 5 years.

i. How much would you have at the end of 5 years using compound interest?

ii. How much would you have using simple interest?

iii. Why these two figures are not the same?

3.​Suppose you buy a 12 percent coupon, 10-year bond today when it is first issued. ​If interest rates suddenly rise to 15 percent, what is the value of your bond?

4.​XYZ Corporation issued 10-year bonds a year ago at a coupon rate of 10 percent. The ​bonds make semiannual payments. If the YTM on these bonds is 7 percent, what is ​the current bond price?

5.​Ponzi Corporation has bonds on the market with 14.5 years to maturity, a YTM of ​6.1 percent, and a current price of $1,038. The bonds make semiannual ​payments. ​What must the coupon rate be on these bonds?

Answer 1

As per rules I am answering the first 4 subparts of the question

1: QNo 1(i) Tax liability = 10%*50000+ 20%*(75000-50000)+ 30%*(100000-75000)+40%*(335000-100000)+ 50%*(2000000-335000)

=$944000

2: Q No 1(ii) Average tax rate = Total tax/ Income

= 944000/2000000

= 47.2%

3:Q No 1 (iii) Marginal tax rate = tax rate of last dollar earned = 50%

4: Q No 2 (i) Future value=Present value*(1+Rate)^number of periods

= 20000*(1+12%)^5

=35246.83