Assume the firms after-tax cost of capital is 6 per annum

Reference no: EM13590146

1. Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income is negative. Consider the before-tax payoffs to the following three projects:

a. Riskless: 10% for sure

b. Moderately Risk: 30% half the time -10% half the time

c: Quite Risky: 300% one time in 10 -20% nine times out of 10

Required:

1. Calculate the before-tax and after--tax expected rates of return for each project.

2. How does the variability of returns affect the expected tax rate? Why?

3. Does this tax structureencourage or discourage high techonology start-up ventures?

2. Assume the firm's after-tax cost of capital is 6% per annum. Wat is the benefit of deferring $1 of income for 1 year,for 2 years, and for 5 years assuming the firm's marginal tax rate is 35%? Suppose the firm expects the top statutory tax rate to increase to 40% next year. Does it still pay to defer income for 1 year,for 2 years, or for 5 years? Explain and discuss your results.

Reference no: EM13590146

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