3.
Marginal Tax Rates
Solution:
Currently, Beta Corporation’s marginal tax rate is 34%.
Beta’s income would need
to exceed $10,000,000 to step-up to the next tax bracket.
Therefore, Beta Corporation should
use a 34% marginal tax rate in evaluating a project that would generate an additional
$200,000 in income.
4.
Marginal Tax Rates
Solution:
Maria should use a 25% tax rate because her income is between $34,000 and
$82,400.
Her tax savings will be $500 ($2,000 deduction x 25%).
31.
Timing Issues
Solution:
a.
Monico should wait to bill its customers until the end of December.
If
Monico’s marginal tax rate is 25%, taxes paid this year would cost $1,250
($5,000 x 25%) resulting in an after-tax cash inflow of $3,750 ($5,000 –
$1,250).
When considering the time value of money, the cost of the taxes that
are deferred until next year will have a present value (cost) of only $1,179
($1,250 x .943 PV factor) or $71 less ($1,250 - $1,179).
b.
Monico should defer billing its customers. If Monico’s marginal tax rate is
15% next year, then its after-tax cash inflow would be $4,293 [$5,000 –
($5,000 x 15% x .943 PV factor)].
Monico should defer billing its customers
because this will result in a $543 higher after-tax cash inflow ($4,293 -
$3,750).
c.