A division of Midland Oil & Gas has a taxable income (TI) of $9.35 million for a

Question

A division of Midland Oil & Gas has a taxable income (TI) of $9.35 million for a tax year. If the state tax rate averages 4% for all states in which the corporation operates, find the equivalent after-tax rate of return (ROR) required of projects that are justified only if they can demonstrate a before-tax return of 22% per year. Use the table given below to calculate taxes, the average tax rate Te and after-tax ROR.

The equivalent after-tax ROR is determined to be  %

If Taxable Income ($) Is But Not over Of the Amount over Over Tax Is 0 50,000 75,000 100,000 335.000 10,000,000 15,000,000 18,333,33.3 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333.333 15% 7,500 + 25% 13,750 + 34% 22,250 + 39% 11 3.900 + 34% 3,400,000 + 35% 5,150,000 + 38% 35% 0 50,000 75,000 100,000 335,000 10,000,000 15,000,000 0

Explanation / Answer

Pretax income               9,350,000 Pretax return 22% Investment =9350000/22%          42,500,000 Tax computatoin 335,000 to 10,000,000 113,900+34% Income over 335000 =9350000-335000            9,015,000 Tax on Income over 335000 @ 34% =9015000*34%            3,065,100 Total Tax =113900+3065100            3,179,000 After tax return =9350000-3179000            6,171,000 Investment          42,500,000 After tax return =6171000/42500000 After tax return 14.52%

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