1. Suppose a firm faces a current tax rate of35% but expects to fall to 20% in the future Employees on average face a current marginal tax rate of 12%pretax but expects the rate to fall to 20%when they retire in 15 years. The firms can earn 12% pretax on pension investment and a 10% after tax on corporate account. Employees on average can earn 10% after tax on their investment which among salary, pension and deferred compensation is tax preferred? Explain your results
2. A newly established firm wants to establish a pension plan for its employees. The firm hires you to prepare a report comparing a defined benefit pension plan with defined contribution pension plan. The firm also requires a recommendation from you as to which plan better suits them. On questioning management, you learn that the firm's future profitability is likely to be highly variable sometimes large profits at other times possible losses. You also learn that the firm is an aggressive tax planner. What type of pension plan would you recommend? Explain your reasoning.