Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition, Instructor’s Manual

Chapter 2: The Business, Tax, and Financial Environments
SOLUTIONS TO PROBLEMS
1. a. Under the partnership, $418,000 in actual liabilities. If sued, they could lose up to their
full combined net worths. As a corporation, their exposure is limited to the $280,000 in
equity that they have in the business.
2.
b. Creditors should be less willing to extend credit, because the personal net worths of the
owners no longer back the claims.
Equipment Machine
Cost $28,000.00 $53,000.00
Depreciation in year:
1 9,332.40 10,600.00
2 12,446.00 16,960.00
3 4,146.80 10,176.00
4 2,074.80 6,105.60
5 6,105.60
6 3,052.80
$28,000.00 $53,000.00
3. Tripex rates
Payment
Percent Subject
to Taxes
Amount Subject
to Taxes Taxes
Interest $180,000 100% $180,000 $61,200
Pfd. Div. 300,000 30% 90,000 30,600
$91,800
4. Corporate income tax
Year Profit Taxes
20X1 $ 0 $ 0
20X2 35,000 5,250
20X3 68,000 12,000
20X4 –120,000 (17,250) tax refund of all prior
taxes paid
20X5 52,000 5,250*
TESTBANKEDUCATION.COM
*Loss carryforward through 20X4 = –$120,000 + $35,000 + $68,000 = -$17,000
Taxable income in 20 × 5 = $52,000 – $17,000 = $35,000
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