The higher net present value of after-tax cash flow

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Reference no: EM13318352

Answer both parts of this assignment, and submit your answer in a single Excel file.

1. A taxpayer has a 35% marginal tax rate. She is faced with two investment options.
a. Option 1: buy a corporate bond for $100,000. The bond pays 4% annually, and matures at $100,000 in 8 years.
b. Option 2: buy corporate stock for $100,000. The stock pays no dividend, but can be sold for $132,000 in 8 years.

Which of these options has the higher net present value of after-tax cash flow? Show your calculations. Use a discount rate of 3%.

2. A married couple has taxable income of $200,000 on a joint return. $130,000 of this is due to the profit of the husband's sole proprietorship. He is considering incorporating the sole proprietorship in order to use the income shifting strategy. If he incorporates, what is the optimal amount of salary (or range of salaries) for him to draw from the corporation each year? Ignore employment taxes and state income taxes. Explain your answer.

Reference no: EM13318352

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