Suppose you will retire in 9 years. Throughout your life you will face a tax rate of

Question:

Suppose you will retire in 9 years. Throughout your life you will face a tax rate of 31% and earn an after-tax rate of return of 8% on your investments. Your company’s pension plan earns a 12% return, and the company itself earns a 10% after-tax return on its own projects. The company faces a current tax rate of 34% and will face a 40% rate in year 9.
a. How much in deferred compensation (D*) would the company have to pay you in year 9 to make you indifferent between future compensation and a $100 bonus now?
b. How much of a contribution to your pension plan (P*) would the company have to make to make you indifferent between pension benefits in 9 years and a $100 bonus now?
c. What is the present value of the after-tax cost of each form of compensation (current bonus of $100, deferred compensation of D*, and pension plan contribution of P*) to the company, using a of 10%? Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...