Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stockof a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Basedon income projections, Marla's share of the S corporation's ordinary income would be approximately $10,000 per year.However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would holdeither investment for three years, at which time she believes the C corporation stock could be sold for $60,000 andthe S corporation stock could be sold for $90,000.Assume that the initial investment would be made in year 0, dividends on the C corporation stock would be receivedin years 1, 2, and 3; S corporation earnings would be allocated in years 1, 2, and 3; and either investment would besold in year 3. Assume that Marla's S corporation income would not qualify for the QBI deduction. Also assume thatMarla's marginal tax rate on ordinary income is 35 percent. Use Appendix A.a. Using a 4 percent discount rate, calculate the net present value of after-tax cash flows attributable to eitherinvestment. Assume a 15% rate on capital gains and dividends.b. Which investment she should choose? Complete this question by entering your answers in the tabs below.Required A Required BUsing a 4 percent discount rate, calculate the net present value of after-tax cash flows attributable to either investment.Assume a 15% rate on capital gains and dividends. Use appropriate factors from the Appendix A. (Cash outflows should beindicated by a minus sign. Round intermediate calculations to the nearest whole dollar amount.)Investment ABefore-tax cash flowsTax (cost) or savingsAfter-tax cash flowsNPVInvestment BBefore-tax cash flowsTax (cost) or savingsAfter-tax cash flowsNPVYear 0$ (50,000)$Year 00Year 1Year 1Year 2Year 2Year 3Year 3

Net present value is difference between present value of cash inflows and present value of cash…

Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projections, Marla's share of the S corporation's ordinary income would be approximately $10,000 per year. However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would hold either investment for three years, at which time she believes the C corporation stock could be sold for $60,000 and the S corporation stock could be sold for $90,000.

Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projections, Marla's share of the S corporation's ordinary income would be approximately $10,000 per year. However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would hold either investment for three years, at which time she believes the C corporation stock could be sold for $60,000 and the S corporation stock could be sold for $90,000.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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