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CASE STUDY Tavares Family Corp. is a large company founded in 1983, with headquarters in the city of Wellesley, MA USA. A flat tax rate is applied on the net income of companies located in the state of Massachusetts, according to the table presented in the file fin3013-ps3.xlsx (worksheet pl). Corporate federal income taxes are supposed to be the same in any state of the USA, a flat rate of 21% on the net income (assume that it has been 21% as of 2012 and not 2017), The firm's largest stockholder, who owns 60% of the company stocks, is originally from Portugal and has personal ties with the location of the firm, where he lives and where his parents settled when migrated from Europe. For him, the reason the company is still located there is because that's the best place to be". However, the firm's CFO is not satisfied by operating in Massachusetts, arguing that their activities do not depend strategically on that location. After elaborating a study on taxation in the USA, she concludes that Tavares Family Corp. could be operating anywhere in the USA, since their suppliers and customers are spread throughout the USA, and that moving to another state wouldn't affect the costs of the company. But, by moving to another state, the company would benefit from not paying an exorbitant amount in state corporate income taxes, millions of dollars every year". The team responsible for the study based their conclusions on projections of net income and state income taxes for the next 10 years. A decision needs to be made regarding the location of this company, focused on the maximization of the stockholders' equity. You are responsible for providing the management with suggestions on where to move the company to achieve the best financial results (minimizing corporate taxes) in this period of 10 years (2022-2031). The decision on moving the company plant and headquarters to another state depends hypothetically on 3 variables: (1) moving costs that are not deductible for tax purposes, (2) the new tax rate gains, and (3) state subsidies/ incentives. There are some costs to move their operations to another state, but also there are some subsidies offered by states for the installation of their company, also exhibited in the file fin3013-ps3.xlsx (worksheet p1). The firm's owner is willing to move the plant to another state, but not to anywhere. He is open to the following states (candidates): New York, California, Florida, Connecticut, Maryland, New Jersey, Delaware, Virginia, Vermont or New Hampshire (a) Calculate the state corporate taxes paid by the company during the period of 2012-2021, year by year and total amount (suppose that the company pays the taxes in the same year of the income earned). (b) Calculate the federal corporate taxes paid by the company during the period of 2012-2021. Consider that In this case, there is a hypothetical deduction of 100% of the state corporate income taxes paid from the taxable income (net income) when calculating federal taxes (federal taxes won't be calculated on the net income, but on the net income after deduction of state taxes) () How much in taxes (state and federal combined) did the company pay during the period 2012-2021 (year-by-year and total for the period)? (d) What is the average and marginal tax rates of Tavares Family Corp. for each year, considering the combined state and federal corporate income taxes (year-by-year only)? (eBased on the net income forecast for the period 2022-2031, project the state taxes to be paid in each state that is listed as a candidate and for the state of MA (year-by-year, and total amount for the period). (1) Project the federal corporate income taxes to be paid in each year (year-by-year and total for the period; remember to deduct state taxes paid/ due from the federal taxable income), for the period 2022-2031, for each candidate state and for the state of MA. (8) What is the forecasted average and marginal tax rate for each candidate state (for the combined state and federal taxes)? (h) What is the projection of the total amount of taxes to be paid in each of the candidate states (year-by year and entire forecast period), and what would be the total taxes to be paid If the company didn't move from MA? Consider the subsidies/ incentives offered by each of the candidate states and rank those states from the more to the least attractive to move Tavares Family Corp, to, according to the potential financial gains projected for the next 10 years (taxes and state subsidies/ incentives combined). Show the potential gains that the company would have by comparing the gains year-by-year and for the whole forecasted period, comparing scenarios between the candidate states and the state of Massachusetts, where the company is currently located. In your decision, do not consider the time value of money, or that all the values are already converted to current US Dollars. Questions (a) What is liquidity? Why is it important? (b) Explain the difference between book value and market value. Which is more important to the financial manager? Why? () What is the income statement equation? (d) What is the difference between a marginal and an average tax rate? (e) What is the cash flow identity? Explain what it says. What are the components of operating cash flow? CASE STUDY Tavares Family Corp. is a large company founded in 1983, with headquarters in the city of Wellesley, MA USA. A flat tax rate is applied on the net income of companies located in the state of Massachusetts, according to the table presented in the file fin3013-ps3.xlsx (worksheet pl). Corporate federal income taxes are supposed to be the same in any state of the USA, a flat rate of 21% on the net income (assume that it has been 21% as of 2012 and not 2017), The firm's largest stockholder, who owns 60% of the company stocks, is originally from Portugal and has personal ties with the location of the firm, where he lives and where his parents settled when migrated from Europe. For him, the reason the company is still located there is because that's the best place to be". However, the firm's CFO is not satisfied by operating in Massachusetts, arguing that their activities do not depend strategically on that location. After elaborating a study on taxation in the USA, she concludes that Tavares Family Corp. could be operating anywhere in the USA, since their suppliers and customers are spread throughout the USA, and that moving to another state wouldn't affect the costs of the company. But, by moving to another state, the company would benefit from not paying an exorbitant amount in state corporate income taxes, millions of dollars every year". The team responsible for the study based their conclusions on projections of net income and state income taxes for the next 10 years. A decision needs to be made regarding the location of this company, focused on the maximization of the stockholders' equity. You are responsible for providing the management with suggestions on where to move the company to achieve the best financial results (minimizing corporate taxes) in this period of 10 years (2022-2031). The decision on moving the company plant and headquarters to another state depends hypothetically on 3 variables: (1) moving costs that are not deductible for tax purposes, (2) the new tax rate gains, and (3) state subsidies/ incentives. There are some costs to move their operations to another state, but also there are some subsidies offered by states for the installation of their company, also exhibited in the file fin3013-ps3.xlsx (worksheet p1). The firm's owner is willing to move the plant to another state, but not to anywhere. He is open to the following states (candidates): New York, California, Florida, Connecticut, Maryland, New Jersey, Delaware, Virginia, Vermont or New Hampshire (a) Calculate the state corporate taxes paid by the company during the period of 2012-2021, year by year and total amount (suppose that the company pays the taxes in the same year of the income earned). (b) Calculate the federal corporate taxes paid by the company during the period of 2012-2021. Consider that In this case, there is a hypothetical deduction of 100% of the state corporate income taxes paid from the taxable income (net income) when calculating federal taxes (federal taxes won't be calculated on the net income, but on the net income after deduction of state taxes) () How much in taxes (state and federal combined) did the company pay during the period 2012-2021 (year-by-year and total for the period)? (d) What is the average and marginal tax rates of Tavares Family Corp. for each year, considering the combined state and federal corporate income taxes (year-by-year only)? (eBased on the net income forecast for the period 2022-2031, project the state taxes to be paid in each state that is listed as a candidate and for the state of MA (year-by-year, and total amount for the period). (1) Project the federal corporate income taxes to be paid in each year (year-by-year and total for the period; remember to deduct state taxes paid/ due from the federal taxable income), for the period 2022-2031, for each candidate state and for the state of MA. (8) What is the forecasted average and marginal tax rate for each candidate state (for the combined state and federal taxes)? (h) What is the projection of the total amount of taxes to be paid in each of the candidate states (year-by year and entire forecast period), and what would be the total taxes to be paid If the company didn't move from MA? Consider the subsidies/ incentives offered by each of the candidate states and rank those states from the more to the least attractive to move Tavares Family Corp, to, according to the potential financial gains projected for the next 10 years (taxes and state subsidies/ incentives combined). Show the potential gains that the company would have by comparing the gains year-by-year and for the whole forecasted period, comparing scenarios between the candidate states and the state of Massachusetts, where the company is currently located. In your decision, do not consider the time value of money, or that all the values are already converted to current US Dollars. Questions (a) What is liquidity? Why is it important? (b) Explain the difference between book value and market value. Which is more important to the financial manager? Why? () What is the income statement equation? (d) What is the difference between a marginal and an average tax rate? (e) What is the cash flow identity? Explain what it says. What are the components of operating cash flow