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# C the manager may negotiate a deal with the merging

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c. The manager may negotiate a deal with the merging competitor that is extremely beneficial to the executive and then sell the firm for less than its fair market value. A good way to reduce the loss of shareholder wealth would be to open the firm up for purchase bids from other firms once the manager makes it known that the firm is willing to merge. If the price offered by the competitor is too low, other firms will up the price closer to its fair market value.

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14 Gitman • Principles of Managerial Finance, Twelfth Edition d. Generally part time or temporary workers are not as productive as full-time employees. These workers have not been on the job as long to increase their work efficiency. Also, the better employees generally need to be highly compensated for their skills. This manager is getting rid of the highest cost employees to increase profits. One approach to reducing the problem would be to give the manager performance shares if they meet certain stated goals. Implementing a stock incentive plan tying management compensation to share price would also encourage the manager to retain quality employees. P1-6. LG 6: Corporate taxes Basic a. Firm’s tax liability on \$92,500 (from Table 1.4): Total taxes due = \$13,750 + [0.34 × (\$92,500 – \$75,000)] = \$13,750 + (0.34 × \$17,500) = \$13,750 + \$5,950 = \$19,700 b. After-tax earnings: \$92,500 – \$19,700 = \$72,800 c. Average tax rate: \$19,700 ÷ \$92,500 = 21.3% d. Marginal tax rate: 34% P1-7. LG 6: Average corporate tax rates Basic a. Tax calculations using Table 1.4: \$10,000: Tax liability: \$10,000 × 0.15 = \$1,500 After-tax earnings: \$10,000 – \$1,500 = \$8,500 Average tax rate: \$1,500 ÷ \$10,000 = 15% \$80,000: Tax liability: \$13,750 + [0.34 × (80,000 – \$75,000)] \$13,750 + (0.34 × \$5,000) \$13,750 + \$1,700 \$15,450 = Total tax After-tax earnings: \$80,000 – \$15,450 = \$64,550 Average tax rate: \$15,450 ÷ \$80,000 = 19.3% \$300,000: Tax liability: \$22,250 + [0.39 × (\$300,000 – \$100,000)] \$22,250 + (0.39 × \$200,000) \$22,250 + \$78,000 \$100,250 = Total tax After-tax earnings: \$300,000 – \$100,250 = \$199,750 Average tax rate: \$100,250 ÷ \$300,000 = 33.4%
Chapter 1 The Role and Environment of Managerial Finance 15 \$500,000: Tax liability: \$113,900 + [0.34 × (\$500,000 – \$335,000)] \$113,900 + (0.34 × \$165,000) \$113,900 + \$56,100 \$170,000 = Total tax After-tax earnings: \$500,000 – \$170,000 = \$330,000 Average tax rate: \$170,000 ÷ \$500,000 = 34% \$1,500,000: Tax liability: \$113,900 + [0.34 × (\$1,500,000 – \$335,000)] \$113,900 + (0.34 × \$1,165,000) \$113,900 + \$396,100 \$510,000 = Total tax After-tax earnings: \$1,500,000 – \$510,000 = \$990,000 Average tax rate: \$510,000 ÷ \$1,500,000 = 34% \$10,000,000: Tax liability: \$113,900 + [0.34 × (\$10,000,000 – \$335,000)] \$113,900 + (0.34 × \$9,665,000) \$113,900 + \$3,286,100 \$3,400,000 = Total tax After-tax earnings: \$10,000,000 – \$3,400,000 = \$6,600,000 Average tax rate: \$3,400,000 ÷ \$10,000,000 = 34% \$20,000,000: Tax liability: \$6,416,667 + [0.35 × (\$20,000,000 – \$18,333,333)] \$6,416,667 + (0.35 × \$1,666,667) \$6,416,667 + 583,333.45 \$7,000,000.45 = Total tax After-tax earnings: \$20,000,000 – \$7,000,000.45 = \$13,000,000 Average tax rate: \$7,000,000 ÷ \$20,000,000 = 35% b. As income increases, the rate reaches 35%.

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16 Gitman • Principles of Managerial Finance, Twelfth Edition P1-8. LG 6: Marginal corporate tax rates Basic a.
Chapter 1 The Role and Environment of Managerial Finance 17 Tax Calculation Pretax Income Base Tax + % × Amount over Base = Tax Marginal Rate \$ 15,000 \$ 0 + (0.15 × 15,000) = \$ 2,250 15.0% 60,000 7,500 + (0.25 × 10,000) = 10,000 25.0% 90,000 13,750 + (0.34 × 15,000) = 18,850 34.0% 200,000 22,250 + (0.39 × 100,000) = 61,250 39.0% 400,000 113,900 + (0.34 × 65,000) = 136,000 34.0% 1,000,000 113,900 + (0.34 × 665,000) = 340,000 34.0%

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18 Gitman • Principles of Managerial Finance, Twelfth Edition 20,000,000 6,416,667 + (0.35 × 1,666,666) = 700,000 35.0%
Chapter 1 The Role and Environment of Managerial Finance 19 b.

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