Essay about Fi 360 Financial Management

1997 Words Jun 26th, 2013 8 Pages
FI 360 Financial Management
June 5, 2013

Unit 1: Week 1 - Homework-1

P1-1. a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will be $500,000 per year under either organizational form. The tax rate on corporate profits is 35 percent (Tc = 0.35), the average personal tax rate for the partners is also 35 percent (Tp = 0.35), and the capital gains tax rate on dividend income is 15 percent (Tdiv = 0.15). ANSWER P1-1a. a. If under these conditions as a partnership, operating income will be taxed only once, so
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But if organized as a corporation, operating income will be taxed once at the corporate level and again at the personal level, so investors will receive only $500,000 (10.35)(10.386) = $199,550. Partners thus pay a total tax rate of 38.6 percent on business income, while corporate shareholders pay a combined tax rate of 60.09 percent [1– (10.35)(1–0.386)] on this income, the “Corporate Tax Wedge” is the difference between these two rates, or 21.49 percentage points (60.09%38.6%).

P1-2. Calculate the tax disadvantage to organizing a U.S. business as a corporation versus as a partnership under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will be $3,000,000 per year under either organizational form. The tax rate on corporate profits is 30 percent (Tc = 0.30); the average personal tax rate for the partners is 35 percent (Tp = 0.35); and the capital gains tax rate on dividend income is 15 percent (Tdiv = 0.15). Then, recalculate the tax disadvantage using the same income but with the maximum tax rates that existed prior to 2003. (These rates were 35 percent (Tc = 0.35) on corporate profits and 38.6 percent (Tp = 0.386) on personal investment income.) ANSWER P1-2 part 1. Current (under provisions of the Tax Relief Act of 2003). If the firm is organized as a partnership, operating income will be taxed only once, so investors will

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