Question Details

Municipal bonds with the same risk, maturity, and liquidity 


1.	Hartzell Inc. had the following data for 2007, in millions:  Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000.  Information for 2008 is as follows:  Net income = $825; after-tax operating income [EBIT (1-T)] = $925; and Total assets = $2,500.  How much free cash flow did the firm generate during 2008?

a.	$383
b.	$425
c.	$468
d.	$514
e.	$566
	
2.	Shrives Publishing recently reported $10,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.  The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.  During the year, the firm had expenditures on fixed assets and net working capital that totaled $1,550.  These expenditures were necessary for it to sustain operations and generate future sales and cash flows.  What was its free cash flow?

a.	$1,873
b.	$1,972
c.	$2,076
d.	$2,185
e.	$2,300
	
3.	A corporate bond currently yields 8.5%.  Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%.  At what tax rate would investors be indifferent between the two bonds?

a.	35.29%
b.	37.06%
c.	38.91%
d.	40.86%
e.	42.90%
	
4.	A 7-year municipal bond yields 4.8%.  Your marginal tax rate (including state and federal taxes) is 27%.  What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

a.	5.64%
b.	5.93%
c.	6.25%
d.	6.58%
e.	6.90%
	
5.	Moose Industries faces the following tax schedule:

	Tax on Base	Percentage on
	Taxable Income			of Bracket		Excess above Base
Up to $50,000	$0	15%
$50,000-$75,000	7,500	25
$75,000-$100,000	13,750	34
$100,000-$335,000	22,250	39
$335,000-$10,000,000	113,900	34
$10,000,000-$15,000,000	3,400,000	35
$15,000,000-$18,333,333	5,150,000	38
Over $18,333,333	6,416,667	35

Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000.  What was the company- net income for the year?

a.	$4,809,874
b.	$5,063,025
c.	$5,329,500
d.	$5,610,000
e.	$5,890,500
	6.	Corporations face the following tax schedule:

	Tax on Base	Percentage on
	Taxable Income			of Bracket		Excess above Base
Up to $50,000	$0	15%
$50,000-$75,000	7,500	25
$75,000-$100,000	13,750	34
$100,000-$335,000	22,250	39
$335,000-$10,000,000	113,900	34
$10,000,000-$15,000,000	3,400,000	35
$15,000,000-$18,333,333	5,150,000	38
Over $18,333,333	6,416,667	35

Company Z has $80,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from preferred stock it holds in other corporations.  What is Company Z- tax liability?

a.	$17,328
b.	$18,240
c.	$19,200
d.	$20,210
e.	$21,221




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