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# Chapter Two:

## The Financial Market Environment

Problems #P2-1, P2-5; page 49.

Problem #P2-1:

## Tantor Supply Inc.’s Earning during 2013 = \$92,500

Tax Liability = Taxes Due on Base + ( Taxable Income - Base of Bracket ) Tax Rate
of Bracket

## Part c: Average Tax Rate:

A firm’s “average tax rate” can be calculated with the following formula:

Pre-Tax Income

## Average Tax Rate = \$19,700 = 21.30%

\$92,500

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Part d: Marginal Tax Rate

As Tantor Supply Inc.’s Earning during 2013 is \$92,500 which is According to Table 2.1 –
Corporate Tax Rate Schedule, Slab-III, is crossing \$75,000. Therefore, marginal tax rate will be
34%.

## Earnings Before Interest and Taxes (EBIT) \$50,000

Less: Interest Expense \$12,000
Earnings Before Taxes (EBT) \$38,000
Less: Income Tax Expense \$13,300
EBT x 35% => \$38,000 x 35%
Earnings After Taxes \$24,700

Note:
No dividend is considered in calculation.

## Earnings Before Interest and Taxes (EBIT) \$50,000

Less: Interest Expense -
Earnings Before Taxes (EBT) \$50,000
Less: Income Tax Expense \$17,500
EBT x 35% => \$50,000 x 35%
Earnings After Taxes \$32,500

## Less: Preferred Dividend paid \$12,000

Earnings available for common Stockholder \$20,500

Note:
No interest payment is considered in calculation.