Effective Tax Planning

Question 1

To maximize after-tax return, what are three things you need to consider?

Answer 1

(1) Consider all parties
(2) Consider both explicit and implicit taxes
(3) Consider non-tax costs

Question 2

How do we typically measure after-tax economic value?

Answer 2

By the PV of after-tax cash flows

Question 3

What is the primary purpose of the ATCF model?

Answer 3

To convert pre-tax cash flows to an after-tax cash flows basis so that business and investment alternatives can be evaluated

Question 4

According to the ATCF Model, how do you compute ATCF?

Answer 4

BTCF
\+/- adjustments
= TI
* t
= Taxes

BTCF
- Taxes
= ATCF

Question 5

When can you use the short-cut ATCF model?

Answer 5

If BTCF = TI (so no adjustments)

Question 6

What is the short-cut ATCF model?

Answer 6

ATCF = BTCF * (1 - t)

Question 7

What tax rate (t) is used to analyze the cash flows?

Answer 7

Marginal statutory tax rate

Question 8

Define marginal statutory tax rate.

Answer 8

Tax due on a one-unit change in income (change in tax divided by the change in TI)

Question 9

Define marginal effective tax rate.

Answer 9

Change in tax divided by the BTCF (when using this to compute an ATCF, the adjustment is captured in the computed tax rate)

Question 10

What items can complicate the marginal tax rate computation?

Answer 10

• Progressive tax brackets
• Phase-outs (credits and deductions)
• Tax in more than one jurisdiction (federal and state taxes)
• Timing of the tax payment

Question 11

Distinguish BTCF from ATCF. Why should the focus be on ATCF?

Answer 11

Unlike BTCF, ATCF incorporates taxes and thus better reps economic income. Since objective is to max ATCF, it is important that ATCF are analyzed.