Problem $18-52($LO$.7)$

Refer to Example $42$ in text Section $18-5$f$.$

Albert owns $100\%$ of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company.

Each business generated $$500,000$ of taxable income and before$-$tax cash flow.

A Corporation and B Company produce a product, but C Company provides accounting services.

A Corporation will distribute $$200,000$ of its after$-$tax income to Albert.

All three owners face a $37\%$ marginal tax rate on ordinary income.

B Company qualifies for the $199$A deduction, but C Company does not because it provides accounting services and its taxable

income exceeds the threshold for that deduction.

Assume the tax rate applied to dividend income equals the top $20\%$ net long$-$term capital gain rate plus the $3\mathrm{.}8\%$ net investment income

tax rate. The corporate tax rate is $21\%$ and $199$ A deduction is $20\%.$

What will be the values of A Corporation, B Company, and C Company after three years? Assume that each business $($a$)$ required a

$$5,000,000$ initial investment, $($b$)$ earns an annual $10\%$ before$-$tax rate of return on the beginning$-$of$-$the$-$year investment, $($c$)$ can reinvest

its after$-$tax cash flow back into the business, and $($d$)$ there is no unrealized appreciation of their assets.

A Corporation

Initial investment

Taxable income to owners in year $1$

After$-$tax cash flow for year $1$

Investment at the end of year $1$

Taxable income to owners in year $2$

After$-$tax cash flow for year $2$

Investment at the end of year $2$

Taxable income to owners in year $3$

B Company

$$5,000,000$

$$5,000,000$

C Company

$$5,000,000$