Leslie participates in IBOs non-qualified deferred compensation plan.For 2018, she is deferring 10 percent of her $300,000

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Leslie participates in IBO’s non-qualified deferred compensation plan.For 2018, she is deferring 10 percent of her $300,000 annual salary.Based on her deemed investment choice, Leslie expects to earn a 7 percent before-tax rate of return on her deferred compensation, which she plans to receive in 10 years.Leslie’s marginal tax rate in 2018 is 32 percent.IBO’s marginal tax rate is 21 percent (ignore payroll taxes in your analysis).

a. Assuming Leslie’s marginal tax rate in 10 years (when she receives the distribution) is 33 percent, what is Leslie’s after-tax accumulation on the deferred compensation?

b. Assuming Leslie’s marginal tax rate in 10 years (when she receives the distribution) is 20 percent, what is Leslie’s after-tax accumulation on the deferred compensation?

c. Assuming IBO’s cost of capital is 8 percent after taxes, how much deferred compensation should IBO be willing to pay Leslie that would make it indifferent between paying 10 percent of Leslie’s current salary or deferring it for 10 years?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Taxation Of Individuals And Business Entities 2019 Edition

ISBN: 9781259918391

10th Edition

Authors: Brian C. Spilker, Benjamin C. Ayers, John Robinson, Edmund Outslay, Ronald G. Worsham, John A. Barrick, Connie Weaver

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