Financial Management: Tax Liability, Risk and Returns, Financing Requirements

FINANCIAL
MANAGEMENT

Table of Contents
QUESTION 1...................................................................................................................................1
a. Computing Tax Liability of Sanderson, Inc............................................................................1
b. Evidencing the Importance of Taxation and its socio-economic purposes.............................2
QUESTION 2...................................................................................................................................3
a. Evaluating feasibility of investment based on risk and returns...............................................3
b. Concept of Risk and Diversification.......................................................................................5
QUESTION 3...................................................................................................................................5
a. Estimating Holycross' Total Financing and Net Funding Requirements................................5
b. Forecasting to ascertain discretionary financing needed (DFN).............................................6
QUESTION 4...................................................................................................................................7
a. Calculation of Ratios...............................................................................................................7
b. Advantages and limitations of Ratio Analysis........................................................................9
QUESTION 5.................................................................................................................................10
a. Recommending a Project using Investment Appraisal Techniques......................................10
b. Distinctive Features of Capital Budgeting Decisions...........................................................11
QUESTION 6.................................................................................................................................11
a. Financial Statements of Winners Industry............................................................................11
b. Role of Finance Department ................................................................................................13
REFERENCES..............................................................................................................................14

QUESTION 1
a. Computing Tax Liability of Sanderson, Inc.
Corporate Tax Liability is the net annual charge on profits of a business entity that it is
legally obligated to pay to a regulating authority (Means, 2017). As per the Corporate tax
regulations, a certain amount of corporate tax rates are applicable for certain tax limits. On the
basis of this the tax charges due from a firm are calculated. This has been illustrated in the case
of Sanderson, Inc. as under:
Corporate Tax Rates
Between $0 and $50,000 15%
Between $50,001 and $75,000 25%
Between $75,001 and $10,000,000 34%
Between $10,000,000 35%
Additional Surtax:
Between $100,000 and $335,000 5%
Between $15,000,000 and $18,333,333 3%
In the given table, Surtax is that tax which is levied on already tax income. This is mainly
done in order to fund a specific government program. Using this table, the taxes due from the
firm are as follows:
[Sanderson, Inc.] Corporate Tax Liability
Particulars $
Between $0 and $50,000 7,500
Between $50,001 and $75,000 6,250
Between $75,001 and $10,000,000 391,000
Additional Surtax:
Between $100,000 and $335,000 11,750
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Working Notes:
Computation of tax liability
$50000 X 0.15 = 7500
$25000 X 0.25 = 6250
$1150000 X 0.34 = 391000
SUR TAX:
$235000 X 0.05 = 11750
Total Taxes Due = $416500
As per the calculations and working notes provided above, the taxes have been calculated
on corporation's tax liability of $1,225,000. This have been further bifurcated on the basis of tax
limit differences. Hence, firstly a 15% tax rate has been levied on the amount up to $50,000
(=$50,00-$0). The remaining amount is $1,175,000 (=$1,225,000−$50,000). Out of this 25% tax
rate has been levied up to $25,000 (=$75,000-$50,001). It is worthy to note that the firm's annual
taxable income is also eligible for a additional surtax worth $11,750 (=$235,000*0.05).
b. Evidencing the Importance of Taxation and its socio-economic purposes
Taxation is an integral part of any economy that is charged by governments in return of
the public expenditure incurred by them for the welfare of people belonging to that state, region
or economy. Hence, taxes are of paramount importance. The aim of taxation is mainly twofold
viz. Generation of Revenue and Welfare of Public Interest (Schmalbeck, Zelenak and Lawsky,
2015). These are important in order to further development in the economy through improvement
in infrastructures such as buildings, roads, bridges and many more services. This results in not
only infrastructural development but also in socio-economic development of the nation as a
whole. One can say that different tax levy serve different purposes. Thus, they can be classified
in two main categorizes viz. Direct Taxes and Indirect Taxes. It is important to note that these
revenues are unrequited in nature. Originally, federal government's sole purpose was to
generate financing to meet government expenditures. However, as the consumer is assumed to be
knowledgable about the quality and safety and the environment is highly dynamic, this purpose
cannot solely define the government's intentions. Just like a business entity, the government
needs to be socially responsible so as to gain trust and act transparently while concerning
themselves with consumer affairs. For instance, federal government tends to contribute 8 percent
to the elementary as well as secondary education of the children (Federal Government and
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