Question

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Use the following information to answer the following question(s).

In 2004, A & K, Inc. expects operating income (earnings before interest and taxes) of $18,000,000. In addition, the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay $1,000,000 in dividends to its common stockholders.

1) Estimate A & K's total tax liability for 2004 (round to the nearest number) assuming the following tax table

Marginal tax rates              Income levels     

15%                                                    0                                           50000

25%                                                    50001                   75000

34%                                                    75001                   100000

39%                                                    100001                 335000

34%                                                    335001                 10000000

35%                                                    10000001             15000000

38%                                                    15000001             18333333

35%                                                    over 18333333

1) _______

A) $6,080,000. B) $5,488,250. C) $5,600,000. D) $5,530,000.

Answer 1

Solution:

Taxable Income=EBIT-Interest Expense

=$18,000,000-($20,000,000*10%)

=$16,000,000

Computaion of tax liablity

For first $50,000(50000*15%)	7500
For Next $25,000(25000*25%)	6250
For next $25,000(25000*34%)	8500
For next $235,000($235,000*39%)	91650
For Next $9665000($9,665,000*34%)	3286,100
For next $5000,000(5000,000*35%)	1750,000
For balance $1000,000($1000,000*38%)	380,000
Tax Liablity	$5530,000

Thus correct answer is Option D i.e $5,530,000