Question: 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).