Introduction
In this financial analysis, we will examine three different scenarios involving various calculations related to taxes and cash flow for different corporations. The first scenario involves determining the free cash flow of Carter Swimming Pools based on its net operating profit after taxes and net operating assets. The second scenario focuses on the Talley Corporation and involves calculating its taxable income, tax expense, and after-tax income. Finally, we explore the Wendt Corporation’s federal income tax bill, additional tax on interest income, and additional tax on dividend income. By analyzing these scenarios, we can gain insights into the financial performance and tax obligations of these companies.
To calculate the free cash flow for Carter Swimming Pools, we need to subtract the net increase in net operating assets (NOA) from the net operating profit after taxes (NOPAT).
Net increase in NOA = Current year NOA – Previous year NOA
Net increase in NOA = $13 million – $10 million
Net increase in NOA = $3 million
Free Cash Flow (FCF) = NOPAT – Net increase in NOA
FCF = $16 million – $3 million
FCF = $13 million
Therefore, Carter Swimming Pools’ free cash flow is $13,000,000.
To calculate the taxable income, tax expense, and after-tax income for the Talley Corporation, we need to apply the given information.
Taxable income = Earnings from operating revenues – All operating costs – Interest charges + Tax-exempt dividends received
Taxable income = $490,000 – $30,000 + $25,000
Taxable income = $485,000
Tax expense = Taxable income * Tax rate
Tax expense = $485,000 * 21%
Tax expense = $101,850
After-tax income = Taxable income – Tax expense
After-tax income = $485,000 – $101,850
After-tax income = $383,150
Therefore, the Talley Corporation’s taxable income is $485,000, tax expense is $101,850, and after-tax income is $383,150.
A. To calculate the federal income tax bill for the Wendt Corporation, we need to multiply its taxable income by the federal tax rate.
Federal income tax bill = Taxable income * Tax rate
Federal income tax bill = $55 million * 21%
Federal income tax bill = $11,550,000
Therefore, the Wendt Corporation’s federal income tax bill for the year is $11,550,000.
B. To calculate the additional tax on the $2 million interest income, we need to multiply the interest income by the federal tax rate.
Additional tax on interest income = Interest income * Tax rate
Additional tax on interest income = $2 million * 21%
Additional tax on interest income = $420,000
Therefore, the additional tax on the $2 million interest income is $420,000.
C. To calculate the additional tax on the $2 million dividend income, we need to multiply the taxable portion of the dividend income by the federal tax rate.
Taxable portion of dividend income = Dividend income – (Dividend income * Tax-exempt percentage)
Taxable portion of dividend income = $2 million – ($2 million * 50%)
Taxable portion of dividend income = $2 million – $1 million
Taxable portion of dividend income = $1 million
Additional tax on dividend income = Taxable portion of dividend income * Tax rate
Additional tax on dividend income = $1 million * 21%
Additional tax on dividend income = $210,000
Therefore, the additional tax on the $2 million dividend income is $210,000.
Conclusion
In conclusion, the financial analysis of the given scenarios provided valuable information regarding the cash flow and tax implications for the examined corporations. We determined that Carter Swimming Pools had a free cash flow of $13 million based on its net operating profit after taxes and net operating assets. For the Talley Corporation, we calculated a taxable income of $485,000, a tax expense of $101,850, and an after-tax income of $383,150. Lastly, we found that the Wendt Corporation had a federal income tax bill of $11,550,000, an additional tax of $420,000 on interest income of $2 million, and an additional tax of $210,000 on dividend income of $2 million. These calculations shed light on the financial health and tax obligations of these companies, providing useful insights for financial decision-making.
References
Abubakar, A. H., Mansor, N., & Wan-Mohamad, W. I. A. (2021). Corporate tax avoidance, free cash flow and real earnings management: Evidence from Nigeria. Universal Journal of Accounting and Finance, 9(1), 86-97.
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