t ale for a single S the ver tax rate for a bead of LO 4-2 LO 4-2 LO 4-2, 4-3 d er Alison Ms. JK's marginal 11 L i ncome tax rate is 12 percent. In each o completam ent income tax savings resulting from the girl The si sisted of rental c y cnerating $19.100 annual rental income to its owner The si consisted of a $4.625 interest Coupon from a corporate bond owned by Ms. JK C. The gift consisted of a $2.200 rent check written by the tenants who lease rental property owned by Ms. JK The gift consisted of a corporate bond paying $13.300 annual interest to its owner. 5. Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firm A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85,000 cash. Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72,000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82.500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years. Firm M could restructure the transaction so that the income would be carned by Firm N. Because of the restructuring, the annual income would decrease to $9,000. Should Firm M restructure the transaction? 9. Company Khas a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before tax cash flows year 0. $12.000; year I. $21.000; year 2. $24,000; year 3. $17.600. in the war received, compute LO 4-2 LO 4-2 LO 44 ratend the v otax rate for a single the verge tax rate for head of D. What are the tax liability the marine t individual with $197.200 taxable income What are the tax t h e household with $146.300 4. MS K ent income e a l o LO 4-2 Alison MsKS marginal tax rate is 12 percent In each resulting from the gift 1900 annual rental income to its T 5. 1 corporate bond owned by LO 4-2 4-2, 4-3 LO 4-2 The en d 2 sitten by the tenants who lease rental propenyrted by Ms. The gift consisted of a cortorer bonu paying $13,300 annual interest to its owner. 5. Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firin A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85,000 cash. Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c. Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72.000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82,500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years Firm M could restructure the transaction so that the income would be earned by Firm N. Because of the restructuring, the annual income would decrease to $9.000. Should Firm M restructure the transaction? 9. Company Khas a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before tax cash flows: year 0, $12,000: year I. $21.000; year 2. $24,000; year 3. $17,600. a. Ir the before tax cash flows represent taxable income in the year received, compute the NPV of the cash flows. Compute the NPV ir Company K can defer the receipt of years and I cash flows income until year 2. (It would receive no cash in years 0 and 1 and would receive $57.000 cash in year 2.) LO 4.2 LO 4-4 4-20 Part Two some of Taxi LO 44 LO 44 c Compute the NPV ir Company K can defer paying tax on years and I cash flow until year 2. (It would receive $24,000 cash in year 2 but would pay tax on 557.000 income.) 10. Firm has the opportunity to engage in a transaction that will generate $100,000 cash flow (and taxable income) in year 0. How does the NPV of the transaction change the firm could restructure the transaction in a way that doesn't change before tax cash flow but results in no taxable income in year 0. 550.000 taxable income in year and the remaining $50.000 taxable income in year 29 Assume a 6 percent discount rate and a 21 percent marginal tax rate for the three-year period. TL. What is the effect on the NPV of the restructured transaction in the preceding problem if Firm H's marginal tax rate in year 2 increases to 30 percent 12. French Corporation wishes to hire Leslie as a consultant to design a comprehen sive staff training program. The project is expected to take one year, and the par ties have agreed to a tentative price of $60.000. French Corporation has proposed payment of one-half of the fee now, with the remainder paid in one year when the project is complete If Leslie expects her marginal tax rate to be 24 percent this year and 35 percent next year, calculate the aftern t present value of this contract to Leslie, using a 6 percent discount rate LO 4-4 LO 44 French Corporation expects its marginal tax rate to be 21 percent both years. Calculate the net present value of French's after-tax cost to enter into this contract using a 6 percent discount rate Given that Leslie expects her tax rate to increase next year, she would prefer to receive more of the income from the project up front. Consider an alternative al under which French pays Leslie $42.000 this year, and $16.000 in one year when the contract is complete. Calculate the after-tax benefit of this counter proposal to Leslie and the after-tax cost to French. Are both parties better off under this alternative than under the original plan? 13. Corporation R signed a contract to undertake a transaction that will get 360.000 total cash to the corporation. The cash will represent income in the year resived and will be 21 percent. Corporation Rwill receive $200.000 inwear and $160.000 in year 1. The other party to the contract now wants to restructure the transaction in a way that would increase the total cash to $375.000 ($215.000 reched in year and $160,000 received in year 1). However, Corporation Rwould recognize the entire $375.000 taxable income in year 0. Ir Corporation R uses an 8 percent dis t rutto compute NPV should it agree to restructure the transaction? 14 Firm W. which has a 32 percent marginal tax rate plans to operate a new business hould encrale $40,000 annual cash flow ordinary income for three years and 2) Ahernatively, Farm W could form a new taxable entity the business Entity N would pay tax on the three-year income Entity N) to operate rate. The nondeductible cost of forming Entity N would be $5.00 ne stream at a 21 percent 6 percent discount rate, should it operate the new LO 46.4-7 Operate the bu LO 4-2 LO 4-2 LO 4-2, 4-3 c. What are the tax liability, the marginal tax rate, and the average a ate, and the average tax rate for a head of re household with $446,300 taxable income? 4. Ms. JK recently made a wift to her rold daughter, Alison. MS. income tax rate is 37 percent and Alison's marginal income tax rate is 12 percent. In each of the following cases, compute the annual income tax savings resulting from the gut. a. The gift consisted of rental property rain 19 100 annual rental income to its owner. b. The gift consisted of a $4.625 interest on from a corporate bond owned by Ms. JK c. The gift consisted of a $2.200 rent check written by the tenants who lease rental property owned by Ms. JK. d. The gift consisted of a corporate bond paying $13.000 annual interest to its owner. S. Firm A has a 21 percent marginal tax rate and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm . The owners or Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firm A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85.000 cash Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72,000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82,500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years. Firm M could restructure the transaction so that the income would be carned by Firm N. Because of the restructuring, the annual income would decrease to $9.000. Should Firm M restructure the transaction? 9. Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2. $24,000; year 3. $17,600. a. If the before-tax cash flows represent taxable income in the year received, compute the NPV of the cash flows. b. Compute the NPV ir Company K can defer the receipt of years 0 and 1 cash flows/ income until year 2. (It would receive no cash in years 0 and 1 and would receive $57,000 cash in year 2.) LO 4-2 LO 4-2 LO 4-4 t ale for a single S the ver tax rate for a bead of LO 4-2 LO 4-2 LO 4-2, 4-3 d er Alison Ms. JK's marginal 11 L i ncome tax rate is 12 percent. In each o completam ent income tax savings resulting from the girl The si sisted of rental c y cnerating $19.100 annual rental income to its owner The si consisted of a $4.625 interest Coupon from a corporate bond owned by Ms. JK C. The gift consisted of a $2.200 rent check written by the tenants who lease rental property owned by Ms. JK The gift consisted of a corporate bond paying $13.300 annual interest to its owner. 5. Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firm A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85,000 cash. Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72,000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82.500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years. Firm M could restructure the transaction so that the income would be carned by Firm N. Because of the restructuring, the annual income would decrease to $9,000. Should Firm M restructure the transaction? 9. Company Khas a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before tax cash flows year 0. $12.000; year I. $21.000; year 2. $24,000; year 3. $17.600. in the war received, compute LO 4-2 LO 4-2 LO 44 ratend the v otax rate for a single the verge tax rate for head of D. What are the tax liability the marine t individual with $197.200 taxable income What are the tax t h e household with $146.300 4. MS K ent income e a l o LO 4-2 Alison MsKS marginal tax rate is 12 percent In each resulting from the gift 1900 annual rental income to its T 5. 1 corporate bond owned by LO 4-2 4-2, 4-3 LO 4-2 The en d 2 sitten by the tenants who lease rental propenyrted by Ms. The gift consisted of a cortorer bonu paying $13,300 annual interest to its owner. 5. Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firin A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85,000 cash. Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c. Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72.000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82,500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years Firm M could restructure the transaction so that the income would be earned by Firm N. Because of the restructuring, the annual income would decrease to $9.000. Should Firm M restructure the transaction? 9. Company Khas a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before tax cash flows: year 0, $12,000: year I. $21.000; year 2. $24,000; year 3. $17,600. a. Ir the before tax cash flows represent taxable income in the year received, compute the NPV of the cash flows. Compute the NPV ir Company K can defer the receipt of years and I cash flows income until year 2. (It would receive no cash in years 0 and 1 and would receive $57.000 cash in year 2.) LO 4.2 LO 4-4 4-20 Part Two some of Taxi LO 44 LO 44 c Compute the NPV ir Company K can defer paying tax on years and I cash flow until year 2. (It would receive $24,000 cash in year 2 but would pay tax on 557.000 income.) 10. Firm has the opportunity to engage in a transaction that will generate $100,000 cash flow (and taxable income) in year 0. How does the NPV of the transaction change the firm could restructure the transaction in a way that doesn't change before tax cash flow but results in no taxable income in year 0. 550.000 taxable income in year and the remaining $50.000 taxable income in year 29 Assume a 6 percent discount rate and a 21 percent marginal tax rate for the three-year period. TL. What is the effect on the NPV of the restructured transaction in the preceding problem if Firm H's marginal tax rate in year 2 increases to 30 percent 12. French Corporation wishes to hire Leslie as a consultant to design a comprehen sive staff training program. The project is expected to take one year, and the par ties have agreed to a tentative price of $60.000. French Corporation has proposed payment of one-half of the fee now, with the remainder paid in one year when the project is complete If Leslie expects her marginal tax rate to be 24 percent this year and 35 percent next year, calculate the aftern t present value of this contract to Leslie, using a 6 percent discount rate LO 4-4 LO 44 French Corporation expects its marginal tax rate to be 21 percent both years. Calculate the net present value of French's after-tax cost to enter into this contract using a 6 percent discount rate Given that Leslie expects her tax rate to increase next year, she would prefer to receive more of the income from the project up front. Consider an alternative al under which French pays Leslie $42.000 this year, and $16.000 in one year when the contract is complete. Calculate the after-tax benefit of this counter proposal to Leslie and the after-tax cost to French. Are both parties better off under this alternative than under the original plan? 13. Corporation R signed a contract to undertake a transaction that will get 360.000 total cash to the corporation. The cash will represent income in the year resived and will be 21 percent. Corporation Rwill receive $200.000 inwear and $160.000 in year 1. The other party to the contract now wants to restructure the transaction in a way that would increase the total cash to $375.000 ($215.000 reched in year and $160,000 received in year 1). However, Corporation Rwould recognize the entire $375.000 taxable income in year 0. Ir Corporation R uses an 8 percent dis t rutto compute NPV should it agree to restructure the transaction? 14 Firm W. which has a 32 percent marginal tax rate plans to operate a new business hould encrale $40,000 annual cash flow ordinary income for three years and 2) Ahernatively, Farm W could form a new taxable entity the business Entity N would pay tax on the three-year income Entity N) to operate rate. The nondeductible cost of forming Entity N would be $5.00 ne stream at a 21 percent 6 percent discount rate, should it operate the new LO 46.4-7 Operate the bu LO 4-2 LO 4-2 LO 4-2, 4-3 c. What are the tax liability, the marginal tax rate, and the average a ate, and the average tax rate for a head of re household with $446,300 taxable income? 4. Ms. JK recently made a wift to her rold daughter, Alison. MS. income tax rate is 37 percent and Alison's marginal income tax rate is 12 percent. In each of the following cases, compute the annual income tax savings resulting from the gut. a. The gift consisted of rental property rain 19 100 annual rental income to its owner. b. The gift consisted of a $4.625 interest on from a corporate bond owned by Ms. JK c. The gift consisted of a $2.200 rent check written by the tenants who lease rental property owned by Ms. JK. d. The gift consisted of a corporate bond paying $13.000 annual interest to its owner. S. Firm A has a 21 percent marginal tax rate and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm . The owners or Firm A decide to incur a $9.500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firm A incurs the expense. b. Firm Z incurs the expense. 6. Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85.000 cash Compute the after-tax cash from the contract assuming that: a. Company G is the party to the contract and provides the services to the client. b. Company J is the party to the contract and provides the services to the client. c Company J is the party to the contract, but Company G actually provides the services to the client. 7. BPK Inc. and OPK Inc. are owned by the same family. BPK's marginal tax rate is 21 percent, and OPK's marginal tax rate is 32 percent. BPK is about to incur a $72,000 deductible expense that would benefit both corporations. OPK could obtain the same mutual benefit by incurring a $82,500 deductible expense. Which corporation should incur the expense? 8. Firm M and Firm N are related parties. For the past several years, Firm M's marginal tax rate has been 30 percent, and Firm N's marginal tax rate has been 21 percent. Firm M is evaluating a transaction that will generate $10,000 income in each of the next three years. Firm M could restructure the transaction so that the income would be carned by Firm N. Because of the restructuring, the annual income would decrease to $9.000. Should Firm M restructure the transaction? 9. Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2. $24,000; year 3. $17,600. a. If the before-tax cash flows represent taxable income in the year received, compute the NPV of the cash flows. b. Compute the NPV ir Company K can defer the receipt of years 0 and 1 cash flows/ income until year 2. (It would receive no cash in years 0 and 1 and would receive $57,000 cash in year 2.) LO 4-2 LO 4-2 LO 4-4