accounting assumptions

On January 3, 2020, Biz Co sought to bid on a large and long term construction project. However, the state and federal governments overseeing the project required that any bid be accompanied by a surety bond guaranteed by approximately $10,000,000 in order to
compete for the project in the bidding process. While Biz Co had the human resources and manpower to complete the construction project, it did not have the financial capability to guarantee such a bond. As a gesture of good faith toward the company, Biz Co’s CEO and shareholder, Monty Warbucks III (“Warbucks”), an engineer by trade and the original founder of Biz Co agreed to guarantee the bond with his own personal assets. Warbucks’ net worth is estimated at aproximately $100,000,000. As a result of Warbucks’ gesture, Biz Co was able to bid on the project and the governments jointly and severally awarded Biz Co with a contract for completion. Since the contract was awarded, Biz Co assumed the financial responsibility for Warbucks’ personal guarantee
and relieved him as a debtor on the bond. Because of the success perpetuated by Warbucks’ generosity, the Biz Co board of direct0rs (“Board”) seeks to issue cash to Warbucks personally for $3,000,000 in consideration for Warbucks’ personal guarantee of the bond as a shareholder. The arrival of the value of the $3,000,000 sought to be issued to Warbucks was determined independently by the Board in consideration for the guarantee provided by Warbucks

Biz Co has asked us to determine exactly what this $ 3,000,000 is to the Warbucks (i.e., compensation, a bonus, a capital transaction, etc). Keep in mind that Warbucks’ annual salary as the CEO of Biz Co is $1,000,000.

What value did the BIZCO project need to carry, in order to justify a $3MM payout to the CEO guarantor? If the taxes are calculated accordingly, what would it take Monty Warbucks III to agree to such an arrangement. Further, if the corporate income tax rate were applied, what amount would BIZCO need to yield in order to make this deal work? Build out a simple schedule, showing how much the bid would need to be worth, given the tax considerations in order for Biz Co to vow $3MM in cash toward winning the bid?

Assumptions:
Bizco Effective Tax Rate: 21% Fed. 10.3% State (CA).
Warbucks: Effective Tax Rate 37% Fed. 10% State (CA).
Example: if the bid was worth $6MM , does it make sense for Biz and Warbucks to run the deal at a $3MM payout? Probably no? So, what are the numbers.

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