Compare the present discounted value of taxes

Reference no: EM131442195

Question: Compare the present discounted value of taxes an individual who is the sole owner of a corporation that has $1 million in profits would pay under the following two scenarios:

(a) She pays out the profits to herself, invests them in a bond yielding 10 percent, which she holds for seven years.

(b) She retains the profits inside the corporation, invests in an asset yielding 10 percent; after seven years, she sells the asset (which has retained its original value), and distributes the proceeds to herself. (For simplicity, look at two cases, one in which the individual is in the 40 percent marginal tax bracket and pays a 20 percent capital gains tax rate; in the other the individual is in the 15 percent marginal tax bracket and pays a 10 percent capital gains tax rate.)

Reference no: EM131442195

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