Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre.
a. Why is corporate finance important to all managers?
Understanding corporate finance is important for a number of reasons. The financial status indicates the health of a corporation. Corporate finance allows managers to make decisions concerning corporate strategies, projects and even funds management. Managers will also be able to identify risk and growth potential.
b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.
The types of organizational forms are proprietorship, partnerships and corporations. Each has their own advantages and disadvantages. A proprietorship has three main advantages: (1) low cost for start-up, (2) it is subject to few government regulations, and (3) its income is taxed as part of the proprietor’s personal income. Although a proprietorship is a low-cost start-up company, unless the owner already processes the funds, it may be difficult to acquire funds for growth. Additionally, the proprietorshi...
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...nds are taxed twice, once at the corporate level and again at the personal level.”
Income after operating costs: $365,000.00
Interest Expense -$50,000.00
Taxable Dividends Received + $4,500.00
Taxable Income: $319,500.00
Tax rate: x39%
Tax Liability $146,855
Talley's marginal tax rate is 39%
Talley's average tax rate is 34%
Corporate After-Tax Yield
The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities