Question

The Wendt Corporation reported $40 million of taxable income. Its federal tax rate was 21%

a. What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

b. Assume the firm receives an additional $4 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

c. Now assume that Wendt does not receive the interest income but does receive an additional $4 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

Answer 1

a. To find the federal income tax bill for the year, we multiply the taxable income by the federal tax rate:

Tax bill = $40,000,000 * 0.21 = $8,400,000.

b. If the firm receives an additional $4 million of interest income, the tax on this interest income would be the product of the interest income and the federal tax rate:

Tax on interest income = $4,000,000 * 0.21 = $840,000.

c. When 50% of dividends received are tax exempt, we find the taxable amount of dividends by multiplying the dividend income by 0.5 and then apply the federal tax rate to this amount:

Taxable dividend income = $4,000,000 * 0.5 = $2,000,000.

Tax on dividend income = $2,000,000 * 0.21 = $420,000.