1. Suppose the tax rate is 30% if taxable income is positive and 0% if taxable i
ID: 2375688 • Letter: 1
Question
1. Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income in negative. Calculate the expected tax payable for the following four projects. Note for each project the expected taxable income is $50,000. For each project, also calculate the expected average tax rate (expected total taxes divided by expected taxable income).
a. certain payoff $50,000
b. a 50% chance of $100,000 and 50% of $0
c. a 50% chance of $200,000 and 50% chance of a loss of $100,000
d. a 50% chance of $500,000 and 50% chance of a loss of $400,00
2. Suppose the tax rate is 0% for taxable income less than $0 (again, no tax refunds for losses and no NOL carryback or carryforwards). For positive taxable income up to and including $25,000, the tax rate is 15%; for taxable income greater than $25,000 but less than $50,000, the tax rate is 25%; and for taxable income greater than $50,000, the tax rate is 34%. Calculate the expected tax payable for the following two projects.
a. a 50% chance fo $100,000 and a 50% chance of a loss of $50,000
b. a 50% chance of $75,000 and a 50% chance of a loss of $25,000
Explanation / Answer
1.a. Tax = 50,000*30% = 15,000
b. Tax = 50%*100,000*30% + 0 = 15,000
c. Tax = 50%*200,000*30% + 0 = 30,000
d. Tax = 50%*500,000*30% + 0 = 75,000
2. a. Tax = 50%*(25,000*15%+25,000*25%+50,000*34%) + 0 = 13,500
b. Tax = 50%*(25,000*15%+25,000*25%+25,000*34%) + 0 = 9,250
Hope this helped ! Let me know in case of any queries.
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