Exercise: 1. Your employer is considering paying you deferred compensation in 5 years or a cash bonus of $1 million today. Here are the facts: • Your tax rate today is 50%. • Your tax rate in 5 years will be 35%. • Your employer's tax rate today is 30%. • Your employer's tax rate in 5 years will be 40%. • Both you and your employer have an after-tax discount rate of 7%.
a. What is the highest deferred-compensation payment (received 5 years from now) that your employer would be willing to pay?
b. What is the lowest deferred compensation payment (received 5 years from now) that you would settle for?
c. Can you and your employer get together and write a mutually beneficial deferred-compensation contract? If so, describe the contract (amount).
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