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You plan to retire 30 years from now. In the current year, you face a 30% tax rate on ordinary income. But, in 30 years
- You plan to retire 30 years from now. In the current year, you face a 30% tax rate on ordinary income. But, in 30 years from now at retirement, you expect to face a 15% rate because you won’t have any wage income to put you in a higher tax bracket. Assume that for the entire period that any dividends and long-term capital gains you have are taxed at a 15% rate. You expect that you can earn an after-tax rate of return of 7% on any investments you make yourself. Your company’s pension plan earns a 11% pre-tax rate of return, and the company itself earns a 9% after-tax return on its own projects. The company currently faces a 21% tax rate but expects it will face a 35% rate in 30 years.
- What is the present value of the after-tax cost of each form of compensation (current bonus from B0, deferred compensation of $10,000, and pension plan contribution of P0) to the company, using a discount rate equal the after-tax rate of return that the company typically earns on its own projects?
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