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##### This is a book problem, whereas the answer is prov...

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This is a book problem, whereas the answer is provided below, however I don't understand what they are using to calculate the proposed line (see below)? 11.11 10.97 10.83 10.63 10.33 How is the formula changing to get the proposed line. HERE IS THE QUESTION: #4 Suppose Congress was to reduce the top capital gains tax rate, tcg, to 10% from 15%. How would this affect the required pretax corporate return, R*c, calculate in the final line of Table 4.4? That is, recalculate the required pretax corporate return for the holding periods and parameter values as listed for the 2003 line in Table 4.4 (see attaches) I need to uderstand this today, because it will help me solve other chapter work. Send me the excel worsheet if necessary or just what the formula needs to look like in excel, for each. I have attached a copy of the book table and question, too! But I want to understand how it's being calculated How is the proposed line was calculated? HERE IS THE PROVIDED ANSWER The last line (as all other lines in table 4.4) was derived as follows: First solve for the required after-corporate tax ? but before shareholder-level tax ? rate of return r*c r*c = {[(1+ rp)n-tcg]/(1- tcg)}1/n ? 1 (4.6) where rp is the after-tax rate of return to the partnership form, n is the holding period, and tcg is the personal tax rate on capital gains. Having defined r*c, we can now express easily the required before-tax return on projects undertaken by corporations, R*c, since it must solve: R*c(1 ? tc) = r*c (4.10) Thus R*c = r*c/(1 ? tc). Note that we could also, given r*c, solve for ts = 1 ? rp/r*c, and then solved for R*C using R*c(1 ? tc)(1 ? ts) = rp implying R*c = Rp(1 ? tp)/[(1 ? tc)(1 ? ts)] Armed with these relations we can quickly calculate R*c by hand or in a spreadsheet. Required R*c for n-yearholding period tc tp tcg Rp 1 5 10 20 50 Current .35 .35 .15 10.00 11.76 11.53 11.30 10.98 10.51 Proposed .35 .35 .10 10.00 11.11 10.97 10.83 10.63 10.33 As expected, decreasing the personal capital gains tax rate decreases the effective shareholder-level tax thus reducing the pretax return required by corporations to be competitive with partnerships.,Here is how the question looks, I sent the Table already,Here is the answer I need to understand how to calculate the last line,Rachel, if you can get the response to me sooner, I would be helpful, as I already have the answer, just need to understand the concept. i'll be studying in a couple of hours and it would be helpful,oh ok, I'll check back after my coffee

Paper#8622 | Written in 18-Jul-2015

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