Carter Inc.and CCC Inc.are owned by the same family.Carter's marginal tax rate is 30%,and CCC's marginal tax rate is 20%.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 $350,000 (i.e., $500,000 x 70%). CCC's after-tax cash flow from the transaction would be $418,500 (i.e., [$500,000 - $42,500] x 80%). Therefore, CCC should engage in the transaction to generate $68,500 more after-tax cash flow than Carter (i.e., $418,500 - $350,000 = $68,500).