CPA #3 Notes
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This 2 page Class Notes was uploaded by Callie Lusk on Friday September 2, 2016. The Class Notes belongs to FIN 330 at Western Kentucky University taught by Rhoades in Fall 2016. Since its upload, it has received 7 views. For similar materials see Print of finance management in Finance at Western Kentucky University.
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Date Created: 09/02/16
Finance 330 Exam #1 Preparation Material from CPA #3 Financial Crisis of 2008 There were many factors that contributed to the Great Recession of 2008. One factor was the troublesome amount of real estate mortgages that were being taken out. o Many were “sub-prime” mortgages Sub-prime mortgages are mortgages issued to people with below average credit scores. o There were false financial records that investors and bankers knew about, and pursued those people with the poor records anyway. Another factor was the real estate price change o More people were buying homes because of the “easy-credit” mortgage availability Also did it to “flip” the houses and sell them for much more than the initial price they purchased for in the beginning. Mortgages were being bundled together o Also known as “mortgage-backed securities” The commercial banks were selling the mortgages to investment banks and giving above the line financial strength ratings. The investment banks were able to get such high financial strength ratings because they were paying the rating agencies, who were all competing for the business of the different investing banks. They were also sold to investors as “safe investments” Business Taxes Ordinary income o Income earned through the sale of goods/services Marginal tax rate o The rate at which additional income is taxed o Also known as the marginal income tax rate Taxable income over Not over Marginal income tax rate $0 $50,000 15% $50,000 $75000 25% $75,000 $100,000 34% $100,000 $335,000 39% $335,000 $10,000,000 34% $10,000,000 $15,000,000 35% $15,000,000 $18,333,333 38% Average tax rate o A firm’s taxes divided by the taxable income o The average tax rate does not equal the marginal tax rate because tax rates change with income levels o For huge corporations with hundreds of millions in dollars in revenue per year, the average tax rate is close to 35% The reason being that most of the firm’s income is taxed at the marginal rate in the top bracket. Capital gains o When the sale price of an asset exceeds the purchase price of that asset. Examples: Home, stocks, bonds, furniture, etc. o Capital gains are added to regular corporate income and taxed at regular corporation rates o Held for more than one year= long term capital gain Long-term capital gains are taxed between 0-20 percent, depending on the marginal tax rate. o Held for less than one year = short term capital gain Short-term capital gains are taxed higher because they are being held for a shorter period of time and are, essentially, temporary. Important formulas o Tax on interest income = taxable amount x tax rate o Tax on dividend income = dividends x (100%- excluded percentage amount) x tax rate o Total tax liability = taxes on operating income + taxes on interest income + taxes on dividend income