Use the data in the table, to calculate the tax disadvantage of retained cash in

ID: 2577325 • Letter: U

Question

Use the data in the table, to calculate the tax disadvantage of retained cash in 1980 and 2002

a. The tax disadvantage of retained cash in 2002 is _____%. (Round to two decimal places.)

b. The tax disadvantage of retained cash in 1980 is _____%. (Round to two decimal places.)

Year Corporate Tax Rate Interest Income Average Rate on Equity Income Dividends Capital Gains

1971-1978 48% 70% 53% 70% 35%

1979-1981 46% 70% 49% 70% 28%

1982-1986 46% 50% 35% 50% 20%

1987 40% 39% 33% 39% 28%

1988-1990 34% 28% 28% 28% 28%

1991-1992 34% 31% 30% 31% 28%

1993-1996 35% 40% 34% 40% 28%

1997-2000 35% 40% 30% 40% 20%

2001-2002 35% 39% 30% 39% 20%

2003-2012 35% 35% 15% 15% 15%

i calculated it at 25.71% for 2002, and at 23.76% for 1980. But i do not believe these are correct answers...

tax disadvantage of retained cash = 1 - [(1-tc)(1-tg)/(1-ti)]

For 2002

capital gain = tg = 20%

Tax rate = tc = 35%

tax rate on equity income = ti = 30%

Tax disadvantage = 1 - [(1-0.35)(1-0.20)/(1-0.30)] = [1 - 0.7429] = 0.2571 = 25.71%

For 1980

capital gain = tg = 28%

Tax rate = tc = 46%

tax rate on equity income = ti = 49%

Tax disadvantage = 1 - [(1-0.46)(1-0.28)/(1-0.49)] = [1 - 0.7624] = 0.2376 = 23.76%

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