Chapter 21: Q. bFCT (page 481)
If administrators of government pension funds for public employees were to discover in a future yes that they had used a discount rate that was too high, who would end up having to ensure payment of promised pensions?
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Identify the main sources of corporate funds and differentiate between stocks and bonds.
The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is percent and the personal income tax rate is localid="1653216490078" percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.
a. If the owner of WebCity expects to earn localid="1653216495193" in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?
b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?
c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" . Should the owner of WebCity incorporate?
d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?
e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" per year in dividends. Would this change in policy affect the decision made in part (a)?
f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
In Problem , that you have now operated your consulting firm for a year. At the end of the first year, your total revenues are . Based on the information in Problem , what is the accounting profit, and what is your economic profit?
You expect to receive a payment of one year from now.
a. Your rate of discount is percent. What is the present value of the payment to be received?
b. Suppose that your rate of discount rises to percent. What is the present value of the payment to be received?
Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.
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