What will be the values of A Corporation, B Company, and C Company after three years? Assume that each business

(a) Required a $5,000,000 initial investment, 

(b) Earns an annual 10% before-tax rate  of return on the beginning-of-the-year investment, 

(c) Can reinvest its after-tax cash flow back into the business, and 

(d) There is no unrealized appreciation of their assets. Use spreadsheet software such as Microsoft Excel to prepare your answer.

Transcribed Image Text:

Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company. Each business generated $500,000 of taxable income and before-tax cash flow. A Corporation and B Company produce a product, but C Company provides accounting services. A Corporation will distribute all of its after-tax income to Albert. All three owners face a 37% marginal tax rate on ordinary income. What is the after-tax cash flow and effective tax rate for each business? B Company qualifies for the § 199A deduction, but C Company does not because it provides accounting services and its taxable income exceeds the threshold for that deduction. The table below compares the tax and cash flow consequences for each business. Taxable income and before-tax cash flow Corporate tax @ 21% Cash available to owners § 199A deduction @ 20% Taxable income to owners Shareholder tax on dividend income @ 23.8% Individual tax on ordinary income @ 37% Before-tax cash flow Corporate tax Shareholder tax on dividend income Individual tax on ordinary income After-tax cash flow Effective tax rate A Corporation $ 500,000 (105,000) $ 395,000 -0- $ 395,000 ($ 94,010) $ $ 500,000 (105,000) (94,010) -0- $ 300,990 39.8% B Company $500,000 -0- $500,000 (100,000) $400,000 $ -0- ($148,000) $500,000 (148,000) $352,000 29.6%