Question 3 (10 points) Uniontown Books began operating in 2011. The company lost

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Question 3 (10 points)

Uniontown Books began operating in 2011. The company lost money its first three years of operations, but has had an operating profit during the past two years. The company’s operating income (EBIT) for its first five years was as follows:

The company has no debt, and therefore, pays no interest expense. Its corporate tax rate has remained at 34% during this 5-year period. What was Uniontown’s tax liability for 2015? (Assume that the company has taken full advantage of the carry-back and carry-forward provisions, and assume that the current provisions were applicable in 2011.)

Question 3 options:

$1,175,040

$1,040,400

$1,468,800

$1,224,000

$1,150,560

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Question 4 (10 points)

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes’ Market Value Added (MVA) is $198 million, what is the company’s stock price? (Round your final answer to two decimal places.)

Question 4 options:

$94.62

$68.06

$75.53

$83.00

$92.13

Year EBIT 2011 -$1,600,000 2012 -$2,000,000 2013 -$1,000,000 2014 $1,200,000 2015 $7,000,000

Explanation / Answer

Question 3

Accumulated loss of 2011, 2012 and 2013 = 1,600,000 + 2,000,000 + 1,000,000

= $4,600,000

Tax rate = 34%

Hence, tax credit on loss to be carried forward = 4,600,000 x 34%

= $1,564,000

Operating income of 2014 = $1,200,000

Tax liability in 2014 = 1,200,000 x 34%

= $408,000

Tax credit on loss adjusted in 2014 = $408,000

Hence, tax payable in 2014 = 408,000 - 408,000

= 0

Tax credit on loss to be carried forward = $1,564,000 - 408,000

= $1,156,000

Operating income of 2015 = $7,000,000

Tax liability in 2015 = 7,000,000 x 34%

= $2,380,000

Tax credit on loss adjusted in 2015 = $1,156,000

Hence, tax payable in 2015 = 2,380,000 - 1,156,000

= $1,224,000

Hence,correct option is (d)

Question 4.

Value of common equity = $300 million

Market value added = $198 million

Number of common stock outstanding = 6 million

Stock price = (Value of common equity + Market value added)/Number of common stock outstanding

= (300 + 198)/6

= 498/6

= $83.00

Hence,correct option is (d)

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.

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