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total pretax income

29. Taxes. Reconsider the data in problem 10 which imply that you have $100,000 of total pretax income to allocate between your salary and your firm`s profits. What allocation will minimize the total tax bill? Hint: Think about marginal tax rates and the ability to shift income

from a higher marginal bracket to a lower one.

1 Cash and equivalents would increase by $100 million. Property, plant, and equipment would increase by $400 million. Long-term debt would increase by $500 million. Shareholders` equity would not increase: assets and liabilities have increased equally, leaving shareholders` equity unchanged.

2 a. If the auto plant were worth $14 billion, the equity in the firm would be worth $14 $4 = $10 billion. With 100 million shares outstanding, each share would be worth $100.

b. If the outstanding stock were worth $8 billion, we would infer that the market values the auto plant at $8 + $4 = $12 billion. The net cash flow pattern does make sense. The firm expends $100 in period 1 to produce the product, but it is not paid its $150 sales price until period 3. In period 2 no cash is exchanged.

4 a. An increase in inventories uses cash, reducing the firm`s net cash balance.

b. A reduction in accounts payable uses cash, reducing the firm`s net cash balance.

c. An issue of common stock is a source of cash.

d. The purchase of new equipment is a use of cash, and it reduces the firm`s net cash balance.

Taxes owed by Firm A fall from $21 million to $14 million. The reduction in taxes is 35 percent of the extra $20 million of interest income. Net income does not fall by the full $20 million of extra interest expense. It instead falls by interest expense less the reduction in taxes, or $20 million $7 million = $13 million. 6 For a single taxpayer with taxable income of $70,000, total taxes paid are

(.15 Р РЈР Р· $25,750) + [.28 Р РЈР Р· (62,450 25,750)] + [.31 Р РЈР Р· (70,000 62,450)] = $16,479

The marginal tax rate is 31 percent, but the average tax rate is only 16,479/70,000 = .235, or 23.5 percent.

For the married taxpayers filing jointly with taxable income of $70,000, total taxes paid are

(.15 Р РЈР Р· $43,050) + [.28 Р РЈР Р· (70,000 43,050)] = $14,003.50

The marginal tax rate is 28 percent, and the average tax rate is 14,003.50/70,000 = .200, or 20.0 percent.