Taxation Homework 6 - michel brown PDF

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41.

Award: 10.00 points

Problems? Adjust credit for all students.

This year, Mr. Joss accepted a job with BL Inc. He intends to work for only eight years and then start his own business. He has two options for accumulating the money he will need for this business. Option 1: He is eligible to participate in BL’s Section 401(k) plan and can afford to save $5,000 of his salary each year by diverting it to this plan. The plan earns 5 percent a year. Consequently, his plan balance in eight years will be $47,746 ($5,000 for eight years compounded at 5 percent). Option 2: He can take his entire salary in cash, pay income tax, and save $3,600 ($5,000 less $1,400 tax) in an investment fund that earns 5 percent a year. Because the annual earnings are taxable, his savings in the fund will grow at only 3.6 percent a year. Consequently, his fund balance in eight years will be $32,702 ($3,600 for eight years compounded at 3.6 percent). a. Assuming a constant 28 percent combined federal and state tax rate, compute the after-tax cash flow for each options. b. Based on your analysis, which option should Mr. Joss pursue?

Complete this question by entering your answers in the tabs below.

Required A

Required B

Based on your analysis, which option should Mr. Joss pursue? Option 1 Option 2  Required

A

Required B 

Explanation: a. & b. Based on a comparison of after-tax cash in eight years, Mr. Joss should choose Option 2. Fund balance in eight years Tax cost of fund liquidation: Income tax ($47,746 × 28%) Premature withdrawal penalty ($47,746 × 10%)

$ 47,746 (13,369) (4,775) $ 29,602

After-tax value

$32,702

$32,702

References

Learning Objective: Worksheet 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Learning Difficulty: Objective: 3 Hard 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

https://www.coursehero.com/file/62108895/Taxation-Homework-6pdf/ 42.

Award: 10.00 points

Problems? Adjust credit for all students.

Mr. Remling is entitled to a $5,200 bonus this year (year 0). His employer gives him two options. He can either receive his $5,200 bonus in cash, or the employer will credit him with $4,500 deferred compensation. Under the deferral option, the employer will accrue 6 percent annual interest on the deferred compensation. Consequently, the employer will pay $8,059 ($4,500 plus compounded interest) to Mr. Remling when he retires in year 10. In making your calculations, use a 5 percent discount rate. Use Appendix A. a-1. Compute NPV assuming Mr. Remling’s current marginal tax rate is 32 percent, and his marginal tax rate at retirement will be 12 percent. a-2. In order to maximize the NPV, which option should Mr. Remling accept? b-1. Compute NPV assuming Mr. Remling’s current marginal tax rate is 32 percent, and his marginal tax rate at retirement will be 32 percent. b-2. In order to maximize the NPV, which option should Mr. Remling accept?

Complete this question by entering your answers in the tabs below.

Req A1

Req A2

Req B1

Req B2

Compute NPV assuming Mr. Remling’s current marginal tax rate is 32 percent, and his marginal tax rate at retirement will be 12 percent. (Round your intermediate computations and final answers to the nearest whole dollar amount.)

NPV of the current compensation NPV of the deferred compensation

$

3,536

$ 4,354+/-2  Req

Req A2 

A1

Explanation: a-1. Mr. Remling’s after-tax value of the current compensation is $3,536 ($5,200 bonus − [$5,200 × 32%]). The NPV of the deferred compensation is $4,354. Deferred compensation payment in year 10 Tax cost at 12% marginal rate at retirement After-tax cash NPV ($7,092 × 0.614 discount factor at 5%)

$ 8,059 (967) $ 7,092 $ 4,354

a-2. Consequently, Mr. Remling should take the deferred compensation to maximize NPV. b-1. Mr. Remling’s after-tax value of the current compensation is $3,536 ($5,200 bonus − [$5,200 × 32%]). The NPV of the deferred compensation is $3,365. Deferred compensation payment in year 10 Tax cost at 32% marginal rate at retirement After-tax cash NPV ($5,480 × 0.614 discount factor at 5%)

$ 8,059 (2,579) $ 5,480 $ 3,365

b-2. Consequently, Mr. Remling should take the current compensation to maximize NPV.

References

Worksheet

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

https://www.coursehero.com/file/62108895/Taxation-Homework-6pdf/

Learning Difficulty: Objective: 3 Hard 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

https://www.coursehero.com/file/62108895/Taxation-Homework-6pdf/

42.

Award:

Problems? Adjust 10.00 points credit for all

students.

Mr. Remling is entitled to a $5,200 bonus this year (year 0). His employer gives him two options. He can either receive his $5,200 bonus in cash, or the employer will credit him with $4,500 deferred compensation. Under the deferral option, the employer will accrue 6 percent annual interest on the deferred compensation. Consequently, the employer will pay $8,059 ($4,500 plus compounded interest) to Mr. Remling when he retires in year 10. In making your calculations, use a 5 percent discount rate. Use Appendix A. a-1. Compute NPV assuming Mr. Remling’s current marginal tax rate is 32 percent, and his marginal tax rate at retirement will be 12 percent. a-2. In order to maximize the NPV, which option should Mr. Remling accept? b-1. Compute NPV assuming Mr. Remling’s current marginal tax rate is 32 percent, and his marginal tax rate at retirement will be 32 percent. b-2. In order to maximize the NPV, which option should Mr. Remling accept?

Complete this question by entering your answers in the tabs below.

Req A1

Req A2

Req B1

Req B2

In order to maximize the NPV, which option should Mr. Remling accept? Current compensation Deferred compensation  Req

A1

Req B1 

Explanation: a-1. Mr. Remling’s after-tax value of the current compensation is $3,536 ($5,200 bonus − [$5,200 × 32%]). The NPV of the deferred compensation is $4,354. Deferred compensation payment in year 10 Tax cost at 12% marginal rate at retirement After-tax cash NPV ($7,092 × 0.614 discount factor at 5%)

$ 8,059 (967) $ 7,092 $ 4,354

a-2. Consequently, Mr. Remling should take the deferred compensation to maximize NPV. b-1. Mr. Remling’s after-tax value of the current compensation is $3,536 ($5,200 bonus − [$5,200 × 32%]). The NPV of the deferred compensation is $3,365. Deferred compensation payment in year 10 Tax cost at 32% marginal rate at retirement After-tax cash NPV ($5,480 × 0.614 discount factor at 5%)

$ 8,059 (2,579) $ 5,480 $ 3,365

b-2. Consequently, Mr. Remling should take the current compensation to maximize NPV.

References

Worksheet

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Learning Objective: 15-07 Describe the tax benefits https://www.coursehero.com/file/62108895/Taxatioofn fe- Hr eodm beywoIRr k A- 6spad nf /d Roth IRAs. Difficulty: 3 Hard...