Question

# Moose Industries faces the following tax schedule: Taxable Income Tax on Base of Bracket Percent on...

Moose Industries faces the following tax schedule:

Taxable Income Tax on Base of Bracket Percent on Excess Above Base

Base Up to \$50,000 \$0 15%

\$50,000-\$75,000 7,500 25

\$75,000-\$100,000 13,750 34

\$100,000-\$335,000 22,250 39

\$335,000-\$10,000,000 113,900 34

\$10,000,000-\$15,000,000 3,400,000 35

\$15,000,000-\$18,333,333 5,150,000 38

Over \$18,333,333 6,416,667 35

Last year the company realized \$450,000 in operating income (EBIT). Its annual interest expense is \$1,500,000.

a) How much tax does the company owe on this income?

b) What is the average tax rate?

c) What is the marginal tax rate?

Answer to Question a) The company owe nothing on this income as the EBIT is \$450000 and annual interest expense is \$1500000. Thus the company is having a loss of \$1050000. Hence no tax is payable.

Answer to Question b) Average tax rate is 0% as no tax is calculated.

Answer to Question c) Marginal tax rate refers to the rate that is applied to the last dollar of a company's taxable income, based on the statutory tax rate of the relevant jurisdiction, which is partly based on which tax bracket the company occupies. Thus the marginal tax rate here is 35%