Question 1

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

Accepted Answer

A) True 
 B)False  True

Question 2

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Accepted Answer

A) True 
 B)False  False

Question 3

Omar Inc.paid a $24,000 expense,of which only $10,000 was deductible.Which of the following statements is false?

Accepted Answer

A) If Omar's marginal tax rate is 10%,the after-tax cost of the expense is $9,000. 
B) Regardless of Omar's marginal tax rate,the before-tax cost of the expense is $24,000. 
C) If Omar's marginal tax rate is 30%,the after-tax cost of the expense is $21,000. 
D) The after-tax cost of the expense depends on Omar's marginal tax rate. 
A) If Omar's marginal tax rate is 10%,the after-tax cost of the expense is $9,000. 
B) Regardless of Omar's marginal tax rate,the before-tax cost of the expense is $24,000. 
C) If Omar's marginal tax rate is 30%,the after-tax cost of the expense is $21,000. 
D) The after-tax cost of the expense depends on Omar's marginal tax rate. A

Question 4

The present value of a dollar available in a future period increases as the discount rate increases.

Accepted Answer

A) True 
 B)False

Question 5

Rarke Company must choose between two alternate transactions.Transaction 1 requires a $20,000 nondeductible cash outlay,while transaction 2 requires a $25,000 deductible cash outlay.Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Accepted Answer

A) 15% 
B) 20% 
C) 25% 
D) 30% 
A) 15% 
B) 20% 
C) 25% 
D) 30%

Question 6

Mr.and Mrs.Bing purchased a business from Ms.Clark in an arm's length transaction.This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 7

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements is false?

Accepted Answer

A) If the cash inflow is not taxable income,the current-year tax cost of the transaction is zero. 
B) If the cash inflow is taxable income and BMX's marginal tax rate is 25%,the tax cost of the transaction is $5,000. 
C) If the cash inflow is taxable income and BMX's marginal tax rate is 35%,the tax cost of the transaction is $7,000. 
D) None of the above is false. 
A) If the cash inflow is not taxable income,the current-year tax cost of the transaction is zero. 
B) If the cash inflow is taxable income and BMX's marginal tax rate is 25%,the tax cost of the transaction is $5,000. 
C) If the cash inflow is taxable income and BMX's marginal tax rate is 35%,the tax cost of the transaction is $7,000. 
D) None of the above is false.

Question 8

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0,1,2,and 3 at a 5% discount rate.

Accepted Answer

A) $93,075.00 
B) $88,650.00 
C) $81,445.50 
D) None of the above 
A) $93,075.00 
B) $88,650.00 
C) $81,445.50 
D) None of the above

Question 9

Which of the following statements about different tax rates over time is false?

Accepted Answer

A) A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B) Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C) A NPV calculation must assume a constant tax rate for all future periods. 
D) A firm's future tax rate may change because of increases or decreases in future taxable income. 
A) A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B) Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C) A NPV calculation must assume a constant tax rate for all future periods. 
D) A firm's future tax rate may change because of increases or decreases in future taxable income.

Question 10

Pepper Company,which has a 25% marginal tax rate,must choose between two alternative transactions.Transaction 1 requires a $20,400 cash outlay that is a deductible current expense.Transaction 2 requires a $15,000 cash outlay that is a nondeductible current expense.Which transaction has the lesser after-tax cost to Pepper?

Accepted Answer

Transaction 1 has a $15,300 af

Question 11

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow.Which of the following statements is true?

Accepted Answer

A) If the cash outflow is deductible and BMX's marginal tax rate is 20%,the tax savings from the transaction is $4,000. 
B) If the cash outflow is deductible and BMX's marginal tax rate is 30%,the tax savings from the transaction is $6,000. 
C) If the cash outflow is not deductible,the current-year tax savings of the transaction is zero. 
D) All of the above are true. 
A) If the cash outflow is deductible and BMX's marginal tax rate is 20%,the tax savings from the transaction is $4,000. 
B) If the cash outflow is deductible and BMX's marginal tax rate is 30%,the tax savings from the transaction is $6,000. 
C) If the cash outflow is not deductible,the current-year tax savings of the transaction is zero. 
D) All of the above are true.

Question 12

Angela Jones is considering two investments.The first produces $5,000 of tax-exempt income.The second produces income that will be subject to tax at a rate of 15%.Which of the following statements is true regarding Angela's choice?

Accepted Answer

A) Angela should always choose the first investment because it minimizes her tax costs. 
B) If the second investment generates $5,500 of before-tax income,Angela should choose the first investment. 
C) If the second investment generates $6,500 of before-tax income,Angela should choose the second investment. 
D) Both if the second investment generates $5,500 of before-tax income,Angela should choose the first investment and if the second investment generates $6,500 of before-tax income,Angela should choose the second investment are true. 
A) Angela should always choose the first investment because it minimizes her tax costs. 
B) If the second investment generates $5,500 of before-tax income,Angela should choose the first investment. 
C) If the second investment generates $6,500 of before-tax income,Angela should choose the second investment. 
D) Both if the second investment generates $5,500 of before-tax income,Angela should choose the first investment and if the second investment generates $6,500 of before-tax income,Angela should choose the second investment are true.

Question 13

Which of the following statement about private market transactions is false?

Accepted Answer

A) Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
B) The parties negotiate directly with each other. 
C) The parties are dealing at arm's length. 
D) The parties must engage in unilateral instead of bilateral tax planning. 
A) Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
B) The parties negotiate directly with each other. 
C) The parties are dealing at arm's length. 
D) The parties must engage in unilateral instead of bilateral tax planning.

Question 14

The tax savings from a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 15

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0,$4,950 received in year 1,and $3,000 received in year 2 at a 7% discount rate.

Accepted Answer

A) $14,018.00 
B) $14,623.35 
C) $15,647.25 
D) None of the above 
A) $14,018.00 
B) $14,623.35 
C) $15,647.25 
D) None of the above

Question 16

Mr.Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income.If Mr.Trail's marginal tax rate is 40%,compute his after-tax cash flow from the transaction.

Accepted Answer

A) $20,000 
B) $24,000 
C) $34,000 
D) $40,000 
A) $20,000 
B) $24,000 
C) $34,000 
D) $40,000

Question 17

Unlow Inc.must choose between two alternate transactions.Transaction 1 would generate $160,000 cash,all of which would be taxable,while transaction 2 would generate $120,000 cash,none of which would be taxable.Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.

Accepted Answer

A) 15% 
B) 20% 
C) 25% 
D) 30% 
A) 15% 
B) 20% 
C) 25% 
D) 30%

Question 18

Mrs.Scott loaned $100,000 to her daughter Evelyn,who agreed to pay her mother $3,000 annual interest on the debt.This loan is an example of a/an:

Accepted Answer

A) Prohibited transaction 
B) Public market transaction 
C) Related party transaction 
D) Arm's length transaction 
A) Prohibited transaction 
B) Public market transaction 
C) Related party transaction 
D) Arm's length transaction

Question 19

Borden Company has the choice between two investments.Investment 1 will generate a $27,000 deductible loss this year (year 0),$15,000 taxable income in year 1,and $60,000 taxable income in year 2.Investment 2 will generate $16,000 taxable income in years 0,1,and 2.Assume that income and loss reflect before-tax cash flow for Borden.Use Appendix A to determine which opportunity Borden should choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV (round the calculations to the nearest whole dollar)?

Accepted Answer

Investment 1 has a $25,613 NPV ($17,550

Question 20

Every business transaction results in a current tax cost or tax savings.

Accepted Answer

A) True 
 B)False

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Omar Inc.paid a $24,000 expense,of which only $10,000 was deductible.Which of the following statements is false?

The present value of a dollar available in a future period increases as the discount rate increases.

Rarke Company must choose between two alternate transactions.Transaction 1 requires a $20,000 nondeductible cash outlay,while transaction 2 requires a $25,000 deductible cash outlay.Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Mr.and Mrs.Bing purchased a business from Ms.Clark in an arm's length transaction.This transaction occurred in a private market.

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements is false?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0,1,2,and 3 at a 5% discount rate.

Which of the following statements about different tax rates over time is false?

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow.Which of the following statements is true?

Angela Jones is considering two investments.The first produces $5,000 of tax-exempt income.The second produces income that will be subject to tax at a rate of 15%.Which of the following statements is true regarding Angela's choice?

Which of the following statement about private market transactions is false?

The tax savings from a transaction represents a cash inflow.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0,$4,950 received in year 1,and $3,000 received in year 2 at a 7% discount rate.

Mr.Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income.If Mr.Trail's marginal tax rate is 40%,compute his after-tax cash flow from the transaction.

Mrs.Scott loaned $100,000 to her daughter Evelyn,who agreed to pay her mother $3,000 annual interest on the debt.This loan is an example of a/an:

Every business transaction results in a current tax cost or tax savings.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

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Exam 3: Taxes As Transaction Costs

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Omar Inc.paid a $24,000 expense,of which only $10,000 was deductible.Which of the following statements is false?

The present value of a dollar available in a future period increases as the discount rate increases.

Rarke Company must choose between two alternate transactions.Transaction 1 requires a $20,000 nondeductible cash outlay,while transaction 2 requires a $25,000 deductible cash outlay.Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Mr.and Mrs.Bing purchased a business from Ms.Clark in an arm's length transaction.This transaction occurred in a private market.

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements is false?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0,1,2,and 3 at a 5% discount rate.

Which of the following statements about different tax rates over time is false?

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow.Which of the following statements is true?

Angela Jones is considering two investments.The first produces $5,000 of tax-exempt income.The second produces income that will be subject to tax at a rate of 15%.Which of the following statements is true regarding Angela's choice?

Which of the following statement about private market transactions is false?

The tax savings from a transaction represents a cash inflow.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0,$4,950 received in year 1,and $3,000 received in year 2 at a 7% discount rate.

Mr.Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income.If Mr.Trail's marginal tax rate is 40%,compute his after-tax cash flow from the transaction.

Mrs.Scott loaned $100,000 to her daughter Evelyn,who agreed to pay her mother $3,000 annual interest on the debt.This loan is an example of a/an:

Every business transaction results in a current tax cost or tax savings.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters