OWB Inc. and Owin Inc. are owned by the same family. OWB's marginal tax rate is 30%, and Owin's marginal tax rate is 21%. OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow. Alternatively, Owin could engage in the transaction. However, Owin would incur an extra $60,000 deductible cash expense with respect to the transaction. Which of the following statements is true?

Question

Quizplus · Accepted Answer

OWB should engage in the transaction because it has the lower incremental tax rate of 30% compared to Owin's incremental tax rate of 21% plus the extra deductible cash expense of $60,000. By engaging in the transaction, OWB can generate $175,000 in after-tax cash flow ($250,000 x (1-0.3)) while Owin can only generate $145,100 in after-tax cash flow ($250,000 - $60,000) x (1 - 0.21)). Therefore, OWB should engage in the transaction to generate $24,900 more after-tax cash flow. The fact that both corporations are owned by the same family is not relevant to the decision-making process in this scenario.

OWB Inc and Owin Inc