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The ATR as a percentage of economic profit

A corporation has $7 million in equity. During the tax year it takes in $4 million in receipts and earns $2 million in capital gains from the sale of a subsidiary. It incurs labor costs of $250,000, material costs of $500,000, and pays rent for structures of $250,000. Calculate the corporation's total accounting profit and, assuming that the profit is fully taxable, calculate its tax liability using the tax rates in Table 15.2. Calculate the ATR of the corporation as a percentage of its economic profit, assuming that the opportunity cost of capital is 8 percent. Be sure to explain the steps of your answer.

Table 15.2
Taxable Income ATR at Beginning of Bracket MTR
Less than 50,000 0% 15%
more than $50,000 but less than $75,000 15 25
more than $75,000 but less than $10million 18 34
More than $10 Million 34 35


Solution Preview

This company has expenses of $1 million and earns $6 million, so its taxable income, and accounting profit, is $5 million.

The tax table shows us how each level of income is taxed at higher rates. A company early $1 million pays the lower tax rates on income up to $75,000, and 34% on all income after that. This results in an ...

Solution Summary

The ATR as a percentage of economic profit is calculated with explanation in approximately 248 words.