a)
To critically think about: The reason why the tax rate rises to 39 percent from 34 percent when the taxable income is $100,001 and falls to 34 percent when the income is 335,001.
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
b)
To compute: The average tax rate when the taxable income is $335,001 and $18,333,334 and to confirm the answer in Part (a).
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
The average tax rate refers to the total tax bill divided by the total taxable income.
c)
To determine: The new tax bubble, if the threshold of 39 percent tax bracket is reduced from $335,000 to $200,000.
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
Tax bubble refers to the rise in the marginal tax rate in order to match the average tax rate. The 38 percent tax bracket and the 39 percent tax bracket are tax bubbles because they help to maintain the average tax rate of 34 percent and 35 percent respectively.
Want to see the full answer?
Check out a sample textbook solutionChapter 2 Solutions
FUND OF CORPORATE FINANCE LL W/ACCESS
- D6) Suppose there are perfect capital markets with taxes. Investors expect a company to have $120 earnings before interest and taxes in one year. This company has a 25% tax rate, $100 market value of debt, and 20 shares outstanding. This company’s net working capital, depreciation expense, and capital expenditures are all expected to be zero in perpetuity. Investors expect this company to have the same earnings before interest and taxes, market value of debt, tax rate, and number of shares outstanding in perpetuity. The firm’s unlevered cost of equity is 8% and its cost of debt is 5%. Based on this information, what amount would you expect this company’s share price to be closest to? $5 $20 $40 $80 $100 $200 $400arrow_forward1a. Consider the statement that an asset with higher risk must earn higher risk premium. Is it true or false? Please explain. b) A company with growth opportunities has dividend growth every year. Do you agree or not? Please explain. c) The Trump administration lowered corporate tax rate and this is a monetary policy. Is it true or false? If false, what type of policy is it.arrow_forward14. Assume the marginal corporate tax rate is 28%. The firm has no debt in its capital structure. It is valued at $92,393,301. What would be the value of the firm if it issued $50,000,000 in perpetual debt and repurchased the same amount of equity?arrow_forward
- Suppose a firm’s tax rate is 25%. 1. What effect would a $9.26 million operating expense have on this year's earnings? What effect would it have on next year's earnings? (Select all the choices thatapply.) A. A $9.26 million operating expense would be immediately expensed, increasing operating expenses by $9.26 million. This would lead to a reduction in taxes of 25%×$9.26 million=$2.32 million. B. A $9.26 million operating expense would be immediately expensed, increasing operating expenses by $9.26 million. This would lead to an increase in taxes of 25%×$9.26 million =$2.32 million. C. Earnings would decline by $9.26 million−$2.32 million=$6.94 million. The same effect would be seen on next year's earnings. D. Earnings would decline by $9.26 million−$2.32 million=$6.94 million. There would be no effect on next year's earnings. 2. What effect would a $11.75 million capital expense have on this year's earnings if the capital expenditure is depreciated at a rate of $2.35 million…arrow_forwardK1. The Lazy Corporation has marginal corporate tax rate of 21%. Assume that investors in Lazy pay a 15% tax rate on income from equity and a 21% tax rate on interest income. Lazy wants to issue risk-free perpetual debt to reduce its corporate tax burden by $1 million per year in each subsequent year. Assume the risk-free rate is 7%. What is the value added to the firm by this debt issuance.arrow_forwardQuestion 28: MM and Taxes Solar Industries has a debt-equity ratio of 1.25. Its WACC is 7.8 percent, and its cost of debt is 4.7 percent. The corporate tax rate is 21 percent. What is the company’s cost of equity capital? What is the company’s unlevered cost of equity capital? What would the cost of equity be if the debt-equity ratio were 2? What if it were 1? What if it were zero?arrow_forward
- The 39 percent and 38 percent tax rates both represent what is called a tax “bubble.” Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $216,000. What would the new 39 percent bubble rate have to be? (Round your answer to 2 decimal places. (e.g., 32.16)) Bubble rate %arrow_forward2022 ANNUAL RATES INDIVIDUAL INCOME TAX SCHEDULE NO CHARGEABLE INCOME RATE OF TAX First GHS 4,380 Nil Next GHS 1,320 5 percent Next GHS 1,560 10 percent Next GHS 36,000 17.5 percent Next GHS 196,740 25 percent Exceeding GHS 240,000 30 percent Question 2(a) Taxation as a fiscal policy is a very helpful tool in most economies, however some researcher believes that in Ghana, it has become a curse to the economic development and growth of the country. Discussarrow_forwardDiscuss carefully the following quotation: “It is reasonable to assume . . . that business can pass along the full value of the [value-added] tax to final consumers. But if [it is assumed that] businesses have the power to raise prices a dollar for each dollar they pay in value-added taxes, then it should also [be] assume[d] businesses can similarly raise prices against every dollar they now pay in payroll and corporate income taxes” [Cockburn and Pollin, 1992, p. A15].arrow_forward
- 1) Suppose your firm earns $9 million in taxable income.What is the firm's tax liability?What is the average tax rate?What is the marginal tax rate? 50,000 15%50,001 - 75,000 25%75,001- 100,000. 34%100,001-335,000 39%335,001-10,000,000 34%10,000,001-15,000,000. 35%15,000,001-18,333,333 38%18,333,334- 34% ....................................... 2) Entity X earns 6 $ per share. If the discount rate or equity cost to be applied by the company is 20% and the investment profitability is 16%;a) According to the Walter formula, what would the price of shares be in $ if the business had distributed 50% profit? b) According to Walter, is this the optimum rate of dividend distribution? Explainarrow_forward1. Subsidy on inputs 2. Higher interest rates on treasury bonds3. Higher business tax Identify whether each number either: (Select one choice per number) (A) increase inflation(B) decrease inflation(C) does not directly affect economic growth or cannot be determinedarrow_forwardD4) Finance The Grant Corporation is considering permanently adding $500 million of debt to its capital structure. Grant's corporate tax rate is 35% and investors pay a tax rate of 40% on their interest income and 20% on their income from capital gains and dividends. Using Miller’s (1977) model calculate the present value of the interest tax shield provided by this new debt. Please round your answer to the nearest 0.01. 33.33 million 50.00 million 66.67 million 80 million None of the abovearrow_forward