# a ilia natively slate d price is the taxpayer wining to pay for the municipal bond 253687

( A Ilia natively slate d, price is the taxpayer wining to pay for the municipal bond as ing he requires a pretax rate of return of 6% and faces a marginal tax rate of 31 %?) (toes I his example relate to the discussion of implicit taxes in the text? (This exercise asst you are familiar with present value techniques and the pricing of bonds.) ; A taxpayer is considering two mutually exclusive alternatives. Alternative A is to hire accountant at a cost of \$20,000 to research the tax law on a tax-avoidance plan. If succes the plan would save the taxpayer \$21,000 in taxes. The probability of success is estimate be 75%. Alternative B is to hire a marketing firm at a cost of \$18,000, whose task woul, to develop a marketing plan for the taxpayer’s product. If successful, the plan would rec of her advertising costs by \$25,000 without affecting sales revenue. The probability of sue is estimated at 80%. Which alternative should the taxpayer choose if she faces a tax rat I 5% ? Of 35%? Comment on your results. Is tax planning a tax-favored activity? For whc 4. A taxpayer works at a corporation nearing the end of its fiscal year. The company has hi very successful (profitable) year and has decided to award the employee a cash bonu 20% of her annual salary (a bonus of \$30,000). The firm has announced that employees take the cash bonus this year or defer it until next year. The taxpayer faces a current tax of 39.6%, but because she plans to work only a 50% schedule next year, she expects to I a tax rate of 31%. Assuming she can earn 5% after tax on her personal investments, she she accept the bonus this year or next year? Suppose she can earn 15% after tax on personal investments. Would you change your recommendation?
-Planning Problems
I. A large corporation hires you as a consultant. The firm has accumulated tax losses, an expects to be in this position for a number of years. The firm needs a new distribution fa, ity on the West Coast to service its customers there more efficiently. The facility has an e: mated cost of \$10 million. The firm is considering three alternative plans. Under plan A,1 firm can borrow the \$10 million and purchase the facility. Under plan B, the firm can isF. common stock to raise the \$10 million and purchase the facility. Under plan C, the firm c lease the facility from the current owners. The firm asks you to prepare a brief report outl ing the tax consequences of each plan. Your report should also contain your recommenc tion as to the most tax-efficient plan. 2. The compensation committee of a large public corporation engages you to help design a 1 efficient compensation plan for the current chief executive officer (CEO). In a prelimin interview with the compensation committee, you ask for the opportunity to meet with the CI to discuss her personal financial and tax situation. A member of the compensation commits questions why you would want to meet with the CEO. Prepare a response to this question. 3. Refer to problem 2. What nontax considerations might you consider in designing a efficient compensation contract for the CEO? 4. The ABC Corporation is a large multinational company that has facilities (both manul turing and distribution) located in many U.S. states and in overseas countries. The firr. long-serving chief financial officer just retired and his replacement is reviewing the fin economic balance sheet. She discovers that the firm leases many of its distribution facilit and relies heavily on long-term debt for financing. She vaguely recalls having heard abc implicit taxes and tax clienteles and would like these concepts explained and then applied her observations to determine if the firm is bearing implicit taxes and whether the firm is the right clientele.
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1% .1111 IlI I 1111.-111 1)0 111(‘!W inve,,tments hear high implicit taxes’? Who should atidertake these investments? Do they? Who receives the implicit taxes? Which of the following statements accurately describes an efficient tax plan? a I I igh tax-bracket investors should invest in municipal bonds. h Its rarely a good strategy to pay explicit taxes. e. Rent ing durable business assets is more efficient than owning for low-tax-rate investors. t I, I ‘lin ployees prefer to defer receipt of their compensation (assuming this succeeds in istponing the recognition of taxable income) whenever they expect their tax rates to fall in the future. Refer to I 1.1. For an individual, prepare a list of a Income items that are taxed (specifically items included in realized income),,. b Items excluded from realized income. c 1)eahrctions and exemptions. d (`I edits.. Rely!. to I ‘,xhibit 1.1. For a regular corporation, prepare a list of a Income items that are taxed (specifically items included in realized income). I? hems excluded from realized income. I haltict ions and exemptions. ( ‘iedits. WII y is it important for the tax planner to know the tax consequences of a particular kinsact ion not only to the entity employing the tax planner but also to the other party lies) to the transaction? Provide a real-world example to illustrate-your answer. We generally think that taxes lower returns, which means that after-tax returns are lower I han pretax returns. Is this always true, or can you provide counterexamples? I plain the difference between tax avoidance and tax evasion. Provide an example of each at IIVII y.
I .1 [laver A purchased \$100,000 of corporate bonds yielding 12.5% per annum; the interest income from these bonds is taxed at a rate of 28%. Taxpayer B purchased \$100,000 of immmieipal bonds yielding 9% per annum. The interest from these bonds is tax exempt. The laurels have similar maturities and risk. What is the after-tax rate of return earned by each 1:1 xi iyer? Is taxpayer B paying taxes in any sense here? a, Who are the taxes being paid to? I). What is the implied tax rate? A taxpayer is considering buying a fully taxable corporate bond. The bond has a remaining iii.1 I urity of 5 years, promises to pay 6% interest annually (assume the coupon interest is ii.iyiihle annually), and has a face value of \$1,000. The taxpayer faces a 31% tax rate on the Intel est income and requires a pretax rate of return of 6% to invest. What price is the paver willing to pay for this bond? The same taxpayer is also considering buying a tax-. pt municipal bond. The municipal bond has a remaining maturity of 5 years, also pi.muses to pay 6% interest annually (again the coupon interest is payable annually), and I .c. a face value of \$1,000. Assume the corporate and municipal bonds are equally risky. I what price is the taxpayer indifferent between the corporate and municipal bond?
Tax

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