Jerry and Matt Decide to Form a Business

question 10

Multiple Choice

Jerry and Matt decide to form a business.Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest.The business will take out a $25,000 loan to cover the balance of their working capital needs.They expect that the business will have a loss of $38,000 for the first year.In the second year,the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry.Jerry is in the 33% marginal tax bracket and Matt is in the 28% marginal tax bracket.Their marginal tax brackets will not change as a result of profit or loss from this business. What is Matt's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?

• A)$0
• B)$2,184
• C)$6,734
• D)$6,916
• E)$24,050

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Definitions:

Bounded-Rationality Model

This model suggests that individuals make decisions based on limited information and cognitive processing abilities, leading to satisficing rather than optimal outcomes.

Mental Blinders

Cognitive limitations that prevent individuals from seeing alternatives or understanding different perspectives, akin to tunnel vision.

Lone “Geniuses”

Describes individuals who are perceived to have exceptional intellectual or creative power and who work and innovate independently, often contributing significantly to their field.

Evidence-Based Management

The practice of making managerial and organizational decisions based on the best available evidence from scientific and business resources, to improve outcomes.