Question

"The Talley Corporation had taxable operating income of $345,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had
(1) interest charges of $30,000,
(2) dividends received of $5,000, and
(3) dividends paid of $10,000.

Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt."

What are the firm's income tax liability and its after-tax income? What are the company's marginal and average tax rates on taxable income?

Answer 1

Answer:

Income Tax liability is $64,575

After Tax Income is $245,425

Marginal Tax Rate : 21%

Average Tax Rate: 18.72% approx

Explanation:

Income Tax liability is computed on the net income. Net Income is  arrived at by deducting interest expenses and dividends paid and adding up taxable dividend received to taxable operating income.

Therefore, Net Income = Operating Income - interest charges - dividends paid + 50% of dividends received.

Net Income = $345,000 - 30,000 - 10,000 + 2500

Net Income = $ 307,500

Tax Liability = $307,500 × 21% = $64,575

After tax income = Net Income - Tax liability + Dividend exempt from tax

After Tax Income = $307,500 - 64,575 + 2500 = 2,45,425

Marginal Tax Rate is defined as the percentage of tax rate applied to one's income for each tax bracket in which one qualifies.

Marginal Tax Rate =  $\frac{Tax\ Liability}{Taxable\ Income}$

Marginal Tax Rate = $\frac{64,575}{307,500}$

Marginal Tax Rate = 21%

Average Tax Rate = $\frac{Total\ Tax\ Liability}{Total\ Income }$

Average Tax Rate = $\frac{64,575}{345,000}$

Average Tax Rate = 18.72% approx.