Discussion Question: The average tax rate is calculated by dividing the total tax payable by the taxable income and it represents the percentage of the income that goes to pay taxes. Consider the following data for two corporations. ABC and XYZ Inc.: Particulars ABC Inc. (Rs.) XYZ Inc. (Rs.) Gross Profit 2,600,000 2.600,000 Administrative Expenses 800,000 800,000 Depreciation Other Income Taxable Income 200,000 500,000 900,000 900,000 2,500,000 2,200,000 Requirements: i. Calculate the average tax rate for both companies. ii. Briefly describe how the above calculations support the notion that depreciation acts as a tax shield. Your answers must be presented in the following format:

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter2: The Domestic And International Financial Marketplace
Section2.A: Taxes
Problem 3P
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Discussion Question:
The average tax rate is calculated by dividing the total tax payable by the taxable income and it
represents the percentage of the income that goes to pay taxes. Consider the following data for two
corporations. ABC and XYZ Inc.:
Particulars
ABC Inc. (Rs.)
XYZ Inc. (Rs.)
Gross Profit
2,600,000
2.600,000
Administrative Expenses
800,000
800,000
Depreciation
Other Income
Taxable Income
200,000
500,000
900,000
900,000
2,500,000
2,200,000
Requirements:
i. Calculate the average tax rate for both companies.
ii. Briefly describe how the above calculations support the notion that depreciation acts as a tax
shield.
Your answers must be presented in the following format:
Transcribed Image Text:Discussion Question: The average tax rate is calculated by dividing the total tax payable by the taxable income and it represents the percentage of the income that goes to pay taxes. Consider the following data for two corporations. ABC and XYZ Inc.: Particulars ABC Inc. (Rs.) XYZ Inc. (Rs.) Gross Profit 2,600,000 2.600,000 Administrative Expenses 800,000 800,000 Depreciation Other Income Taxable Income 200,000 500,000 900,000 900,000 2,500,000 2,200,000 Requirements: i. Calculate the average tax rate for both companies. ii. Briefly describe how the above calculations support the notion that depreciation acts as a tax shield. Your answers must be presented in the following format:
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