Carter Inc. and CCC Inc. are owned by the same family. Carter's marginal tax rate is 21%, and CCC's marginal tax rate is 10%. Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow. Alternatively, CCC could engage in the transaction. However, CCC would incur an extra $42,500 deductible cash expense with respect to the transaction. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Carter's after-tax cash flow from the transaction would be $395,000 ($500,000 - 21% x $500,000). CCC's after-tax cash flow would be $448,750 ($500,000 - $42,500 x 10%). Therefore, CCC should engage in the transaction to generate $53,750 more pre-tax cash flow and $16,750 more after-tax cash flow.