Sandy will earn a $100,000 bonus that can be split between current and deferred compensation in any of the following ways:
Current (BT$)*                     Deferred (BT$)*
$100,000...................................................$ €“0€“
80,000.....................................................20,000
60,000.....................................................40,000
40,000.....................................................60,000
20,000.....................................................80,000
€“0€“.........................................................100,000
* The numbers in the above lists are BT$ as in the text formulas. Thus, the numbers in the second column are not BT$ × Dn.

Assume that Sandy is subject to the following progressive tax rate schedule in the current and future years:

€¢ Corporate tax rates are as follows: t_co = .35, t_cn = .34.
€¢ Rates of return are as follows: r_c = .08; r_p = .07.
€¢ The length of deferral is five years, i.e., n = 5.
a. What is the best way for Sandy to split the $100,000 bonus given a level of D_n that makes the corporation indifferent?
b. Now assume the bonus allocations are not restricted to $20,000 increments. What is the optimal allocation of the current and deferred bonus given the level of D_n that makes the employer indifferent?

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Income Range Marginal Tax Rate Computation of Tax 0-20,000 20,001-40,000 40,001–60,000 60,001-80,000 0.30 x TI $ 6,000 + 0.325(TI – $20,000) $12,500 + 0.35(TI – $40,000) $19,500 + 0.375(TI – $60,000) $27,000 + 0.4(TI – $80,000) 30.0% 32.5 35.0 37.5 40.0 Over 80,000