Exam 3: Taxes As Transaction Costs

Mrs.Biggs invested in a business that will generate the following cash flows over a three-year period.Use Appendix A. If Mrs.Biggs' marginal tax rate over the three-year period is 30% and she uses a 6% discount rate,compute the NPV of the transaction.

Marginal rate uncertainty includes the risk that Congress will change tax rates,increasing the tax costs of future income.

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Ms.Teague incurred a $35,000 expense.If her marginal tax rate is 20%,which of the following statements is true?

When the tax law applies differentially to transaction alternatives,decisions should focus on before-tax earnings.

Which of the following is not a related party transaction?

The tax cost of a transaction represents a cash inflow.

Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement.Compute the NPV of the revenue using Appendix A if Citran will received $35,000 cash immediately (year 0),$35,000 cash next year (year 1)and $80,000 cash the following year (year 2).Citran will report the revenue as taxable income in the year received.Its marginal tax rate is 30%,and it uses an 8% discount rate.

Zazu Company is considering modifying a transaction to reduce the current year tax cost by $50,000.Which of the following statements is false?

Mr.and Mrs.Dean own an investment that generated $60,000 cash revenue and required $12,000 cash expenses this year.The Deans' marginal tax rate is 25%.Which of the following statements is true?

Ms.Card bought an investment that will generate the following cash flows over a three-year period.Use Appendix A. If Ms.Card's marginal tax rate over the three-year period is 40% and she uses a 6% discount rate,compute the NPV of the transaction (round the final answer to the nearest whole dollar).

Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.

Omar Inc.paid a $24,000 expense,only $18,000 of which was deductible.If Omar's marginal tax rate is 40%,compute the after-tax cost of the expense.

Private market transactions create an opportunity for bilateral tax planning.

Mr.Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0,year 1,and year 2 ($30,000 total cash flow).Which of the following statements is true?

Which of the following statements about marginal tax rates is false?

Late in the current year,Jolsen Company signed a four-year contract with an advertising agency.Under the contract,Jolsen must pay $375,000 annually for the agency's services.After Jolsen signed the contract,Congress enacted legislation disallowing any deduction for advertising expense for future tax years.Jolsen underestimated the after-tax cost of the contract because of:

Arm's length business transactions can occur in: