Last year, Décor Corporation changed its tax year-end from December 31 to March 31. The IRS granted permission for this change based on the seasonability of Decor’s underlying income. Over a period of time, Décor had converted from handling plant-care services in large office buildings to providing Christmas decoration services to businesses and individuals. Because nearly all of Decor’s receivables are now collected in the first few months of the calendar year, a March tax year made sense for the taxpayer and the IRS.The Christmas season operations were so profitable that GiantCo acquired Décor by merger this year. As the entities will be joining in a Federal consolidated income tax return. Décor now must convert to GiantCo’s June 30 tax year. Mary Ellen Rogers, the Décor tax director, oversaw the prior conversion of tax years and remembers the extensive paperwork involved in electing a new tax year-end. She also recalls that a taxpayer cannot change its Federal income tax year more than once in a two-calendar year period. Write a letter to Rogers addressing this issue. Décor tax and executive officers are at 1101 Office Strip Lane, Suite 3, Nashville, TN, 37203

 

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Last year Essex Manufacturing paid $3500 for utilities. This year the company used energy-saving techniques to reduce the utility bills by 13% of last year’s cost. What was the cost of utilities for Essex Manufacturing this year?

 

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Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000.  The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm’s tax rate was 35%.  The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio.  Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%.  By how much would the ROE change in response to the change in the capital structure?

 

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Leverage ratio, please help!

Last year Hubert bought a house in Hanover for $100,000. Suppose that Hubert paid $50,000 as a down payment and took out a mortgage loan of $50,000 to cover the remaining amount.

Hubert’s simple leverage ratio is ___________. Suppose that the price of the house falls by 4%. If Hubert sells his house now, his capital loss will be _________. ( Ignore selling costs and maintenance.) A 4% fall in the price of the house causes a percentage loss of ______ in Hubert’s equity.

 

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Last year, Joban graduated from high school and received a $5,000 as a graduation gift from his uncle.  He just heard a guy in his dorm who invested in a software company and made a huge profit in a few months. Joban is considering investing his $5,000 in the company.  Joban has trouble managing his money and has a large balance on his credit card.  Joban has a part-time job, but spends all of the money he earns.  He also does not understand how investing works.

What advice would you give to Joban?

 

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