Question 1

William, an employee for Williamson Corporation, receives an annual salary of $120,000 and is in the 25 percent marginal tax bracket. He is eligible to contribute to Williamsons 401(k) plan and could contribute the pretax amount of $18,000. Alternatively, he could contribute only $9,000 to the plan and use the remaining $9,000 to purchase municipal bonds paying 6 percent interest.

Evaluate the tax savings and after-tax-cash-flow effects of these two investments choices.

State which option you recommend for William and explain why.

Discuss any additional recommendations/suggestions you have for William regarding his retirement savings.

Question 2

George has a short-term capital loss of $43,000 this year. His brother wants to buy a piece of land that George owns as an investment for $65,000. The lands basis is only $25,000. George also knows that the land is appreciating in value every year, and he is not sure he should sell it now. He thinks if he holds on to the land for three more years, he will be able to sell it for $73,000 net of expenses.

If Georges combined state and federal tax rate is 40 percent and he uses a 6 percent discount rate for all decisions, should he sell the land now? Completely analyze the question and explain your answer.

Question 3

Manual wants to make a contribution worth $10,000 to his favorite charity. He is considering donating one of the four assets set forth below. Which of the following assets should Manuel contribute to his favorite charity and why?

Stock acquired five years ago at a cost of $14,000. The current fair market value is $10,000.

Stock acquired six months ago at a cost of $5,000. The current fair market value is $10,000.

Inventory items acquired last year for Manuels sole proprietorship. Their cost was $15,000, and their current fair market value is $10,000.

$10,000 in cash.

Clearly and completely explain the tax consequences of each of these options. Provide a proper citation to relevant authority.

Question 4

The Barnard Corporation needs additional cash to improve its facilities. It can borrow $1,200,000 from a bank at 7.5 percent interest for 10 years, with a balloon payment of the entire principal at the end of the 10-year period. It can issue $1,200,000 in 10-year corporate bonds paying 6 percent interest, but it will incur underwriting costs related to issuing the bonds of $120,000. Its third alternative is to issue $1,200,000 in preferred stock that will require annual dividend payments of 5 percent. The stock will be callable at the end of 10 years at 102 (meaning Barnard will pay a redemption premium equal to 2% at that time). The costs of issuing the preferred stock will only be $60,000. Which alternative should the corporation choose? The corporations effective tax rate is expected to be 30 percent for all relevant years, and the corporation uses a 6 percent discount rate for all of its financial analyses. Completely analyze the question and explain your answer.

Question 5

Kimo Corporation, a cash basis calendar-year taxpayer, is in the 30 percent marginal tax bracket this year. Kimo owes a $15,000 expense that it may pay before the end of this year or in January of next year.

A. If it expects its marginal tax rate to be 30 percent next year, should it pay the expense this year or next? Use an 8 percent discount factor to explain your answer. Show your calculations and fully explain your answer.

B. How would your answer change if Kimos marginal tax rate next year is only 25%? Show your calculations and fully explain your answer.

C. How would your answer change if Kimos marginal tax rate next year is 34%? Show your calculations and fully explain your answer.