Question

XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 25 percent of their salary for five years. For purposes of this problem, ignore payroll taxes in your computations. (Round your intermediate calculations and final answers to the nearest whole dollar amount.) a. Assume XYZ has a marginal tax rate of 21 percent for the foreseeable future and earns an after-tax rate of return of 9 percent on its assets. Joel Johnson, XYZ’s VP of finance, is attempting to determine what amount of deferred compensation XYZ should be willing to pay in five years that would make XYZ indifferent between paying the current salary of $16,300 and paying the deferred compensation. What amount of deferred compensation would accomplish this objective?

Answer 1