Question

1)Dezin Manufacturing has sales of $299,160 and costs of $151,130. The company paid $23,430 in interest and $12,400 in dividends. It also increased retained earnings by $63,074 during the year. If the company's depreciation was $14,990, what was its average tax rate?

2)During 2019, Maverick Inc. had sales of $748,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $561,000, $98,000, and $132,000, respectively. In addition, the company had an interest expense of $103,000 and a tax rate of 40 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Maverick Inc. paid out $21,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt?

Answer 1

Question 1:

Profit after tax = Increased retained earnings+dividends = $63,074+$12,400 = $75,474

Profit before tax = Sales-cost-depreciation-interest = $299,160-$151,130-$14,990-$23,430 = $109,610

Tax expense = Profit before tax - profit after tax = $109,610-$75,474 = $34,136

Average tax rate = Tax expense/Profit before tax = $34,136/$109,610 = 31%

Question 2)

Net income = sales - Cost of goods sold - administrative and selling expenses - depreciation expenses - interest expense = $748,000 - $561,000 - $98,000 - $132,000 - $103,000 = -146,000

Tax is zero because no carry forward of losses & no tax has to pay on loss.

Dividend paid = $21,000

Net new long term debt = Net income+dividend paid = 146,000+21,000 = $167,000

No change in assets & stock implies whatever reduction in retained earnings is adjusted through debt.