Homework Answers
ANSWER
a)
Current annual corporate tax liability = $200000 * 21% = $42000
b)
Current average tax rate = 42000/200000 = 21%
c)
Financing through cash reserves, new tax liability = 350000 * 21% = $73500
Current average tax rate = 73500 / 350000 = 21%
d)
Financing through debt, new tax liability = (350000-70000) * 21% = $58800
Current average tax rate = 58800 / 280000 = 21%
e)
Residual amount on financing through cash reserves = 350000 – 73500 = 276500
Residual amount on financing through debt = (350000-70000) – 58800 = 221200
So, Financing through cash reserves is recommended being higher residual cash after tax.(assumption: cash reserves kept idle)
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