Question

Required information [The following information applies to the questions displayed below.] XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 35 percent of their salary for five years. For purposes of this problem, ignore payroll taxes in your computations. (Use Table 1.) (Round your intermediate calculations and final answers to the nearest whole dollar amount.) a. Assume XYZ has a marginal tax rate of 21 percent for the foreseeable future and earns an after-tax rate of return of 17 percent on its assets. Joel Johnson, XYZ's VP of finance, is attempting to determine what amount of deferred compensation XYZ should be willing to pay in five years that would make XYZ indifferent between paying the current salary of $16,600 and paying the deferred compensation. What amount of deferred compensation would accomplish this objective? Deferred compensation

Answer 1

Answer
Part A
Deferred compensation	$36395
After taxes= 16600*(1-21%) = 13114
Equivalent amount in five years = 13114*(1.17^5) = 28752
Deferred compensation=28752/(1-21%) = 36395
Part B
Deferred compensation	$29256
After taxes = 16600*(1-37%) = 10458
Equivalent amount in five years= 10458*(1.12^5) = 18431
Deferred compensation= 18431/(1-37%) = 29256