Question

ABC Systems located in Alabama expects a 9% after-tax rate of return on an equipment investment. The state tax rate is 6%. If the company is in the 34% federal tax bracket, estimate the before-tax rate of return required. Hint: Combined tax rate

Answer 1

Answer: 14.5%

Explanation:

The after tax return is calculated by the formula:

= Before tax return * (1 - federal tax) * (1 - State tax)

As we have the after tax return, we should work on the before tax:

9% = Before tax return * (1 - 34%) * (1 - 6%)

9% = Before tax return * 0.6204

Before tax return = 9% / 0.6204

= 14.5%