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In an economy, the supply curve of labor, LS , is given by, LS = − 100 + 200 wn and wn = ( 1 − t ) wg where wn is the net-of-tax wage rate, wg is the gross-of-tax wage rate and t is a proportional tax rate. Sketch the supply curve of labor. a) Write a formula for tax revenue, T, as a function of the tax rate, t, and draw the function, T(t), in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis. Tax revenue is the product of hours worked and the amount of tax per hour worked. You can assume that the before-tax wage rate, wg , is fixed at HK$32.50. You can straightforwardly use Excel software to plot your tax revenue function. Suppose that the government currently imposes a tax rate of 17 percent. What advice would you give it? b) Suppose instead that the government currently imposes a tax rate of 51 percent. What advice would you give it? Is there a Laffer effect? An alternative approach to figuring out this problem is to use simple differential calculus. Using this approach, at what tax rate is tax revenue maximized in this economy? HINT: T(t) = k × t 2 where k is a constant. Marginal Tax revenue MT(t) = = ? ? t T(t) k × 2 × t .
The Snatch Company has outstanding bonds with a coupon rate of 7.75% and semi-annual payments. The bonds are redeemable on June 30, 2035. If Bobby can earn 5.5% on comparable investments and settle the transaction on August 9, 2015, how much should h..
Portfolio Beta Your investment club has only two stocks in its portfolio; $45,000 is invested in a stock with a beta of 0.7, and $80,000 is invested in a stock with a beta of 1.2.What is the portfolio's beta? What is the required rate of return on a ..
Williamson, Inc., has a debt-equity ratio of 2.5. The firm’s WACC is 15%, and its pretax cost of debt is 10%. Williamson is subject to a corporate tax rate of 35%. 1) What is Williamson’s cost of equity capital? 2) What is Williamson’s unlevered cost..
In 2013, McDowell Enterprises negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. Compute the present value of the lease. ..
You burrow $80,000 for 10 years at 4% how much money will you save, over the life of the loan, if you pay off the loan by making payments every two weeks instead of at the end of the month?
Your firm is contemplating the purchase of a new $605,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $65,000 at the end of that time. You will save $235,000 before..
What is the price of a European call option on a non-dividend-paying stock when the stock price is 652, the strike price is $60, the risk-free interest rate is 12% per annum, the volatility is 30% per annum, and the time to maturity is three months?
How much debt is outstanding in a firm that has calculated the present value of a perpetual tax shield to be $300,000 if the tax rate is 35% and the debt carries a 10% rate of return?
in the mid-eighties the toro company launched a promotion in which snow blower purchasers could refund a portion of
Breakeven cash inflows The One Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. If One Ring requires a 9% return on its investment, what..
An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 18 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturit..
Michigan Co. just paid a dividend of $2.00 per share. Analysts expect future dividends to grow at 20% per year for the next four years and then grow at 6% per year thereafter. Calculate the expected dividend in year 5.
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