535-WEEK2HMK #13

PLEASE SOLVE AND ANSWER QUESTION 13 BELOW, WITH EXLANTION WRITTEN OUT

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
    2013     2012
Sales     $11,000     $10,000
Operating costs excluding depreciation     9,360     8,500
Depreciation and amortization     380     360
Earnings before interest and taxes     $ 1,260     $ 1,140
   Less interest     120     100
Pre-tax income     $ 1,140     $ 1,040
   Taxes (40%)     456     416
Net income available to common stockholders     $ 684     $ 624
Common dividends     $ 220     $ 200

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)
    2013     2012
Assets         
Cash     $ 550     $ 500
Short-term investments     110     100
Accounts receivable     2,750     2,500
Inventories     1,650     1,500
Total current assets     $5,060     $4,600
Net plant and equipment     3,850     3,500
Total assets     $8,910     $8,100
Liabilities and Equity         
Accounts payable     $1,100     $1,000
Accruals     550     500
Notes payable     384     200
Total current liabilities     $2,034     $1,700
Long-term debt     1,100     1,000
Total liabilities     $3,134     $2,700
Common stock     4,312     4,400
Retained earnings     1,464     1,000
Total common equity     $5,776     $5,400
Total liabilities and equity     $8,910     $8,100

Loss Carryback and Carryforward   

13. The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2013 the firm incurred a loss of $650,000. The firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations.