Gregly Company,which has a 33% marginal tax rate,plans to make an investment that should generate $300,000 annual cash flow/ordinary income.Instead of making the investment directly,Gregly could form a new taxable entity (L'il Greg)to make the investment.L'il Greg's marginal tax rate on the investment income would be only 25%.However,L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur.
A.Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?
B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

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The Answer of Gregly Company,which has a 33% marginal tax rate,plans to make an investment that should generate $300,000 annual cash flow/ordinary income.Instead of making the investment directly,Gregly could form a new taxable entity (L'il Greg)to make the investment.L'il Greg's marginal tax rate on the investment income would be only 25%.However,L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur.
A.Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?
B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

Gregly Company,which Has a 33% Marginal Tax Rate,plans to Make