Question 1

Which of the following statements about tax minimization is true?

Accepted Answer

A)  Tax minimization always maximizes the NPV of a transaction. 
B)  Tax minimization should be the goal of business and financial planning. 
C)  Tax minimization with respect to a transaction may not be the optimal strategy. 
D)  Tax minimization has no effect on nontax cash flows. 
A)  Tax minimization always maximizes the NPV of a transaction. 
B)  Tax minimization should be the goal of business and financial planning. 
C)  Tax minimization with respect to a transaction may not be the optimal strategy. 
D)  Tax minimization has no effect on nontax cash flows.

Question 2

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Accepted Answer

A)  Arm's length transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Both an arm's length transaction and a private market transaction are true. 
A)  Arm's length transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Both an arm's length transaction and a private market transaction are true.

Question 3

Which of the following statements about discount rates is true?

Accepted Answer

A)  The higher the marginal tax rate, the higher the discount rate for future cash flows should be. 
B)  The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be. 
C)  The longer the time period over which a transaction will generate cash flows, the higher the discount rate should be. 
D)  The greater the amount of cash generated by a transaction, the higher the discount rate should be. 
A)  The higher the marginal tax rate, the higher the discount rate for future cash flows should be. 
B)  The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be. 
C)  The longer the time period over which a transaction will generate cash flows, the higher the discount rate should be. 
D)  The greater the amount of cash generated by a transaction, the higher the discount rate should be.

Question 4

The tax law prohibits related party transactions.

Accepted Answer

A) True 
 B)False

Question 5

The tax cost of a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 6

The tax savings from a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800 
A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800

Question 9

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 these choices are 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 these choices are false.

Question 10

Which of the following statements about public market transactions is true?

Accepted Answer

A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction.

Question 11

Reid Inc. received a $90,000 cash payment, of which only $50,000 was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.

Accepted Answer

A)  $54,000 
B)  $50,000 
C)  $30,000 
D)  None of these choices are correct. 
A)  $54,000 
B)  $50,000 
C)  $30,000 
D)  None of these choices are correct.

Question 12

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 13

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Accepted Answer

A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of these choices are true. 
A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of these choices are true.

Question 14

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 15

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Accepted Answer

A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of these choices are false. 
A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of these choices are false.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about discount rates is false?

Accepted Answer

A)  A discount rate for computing NPV cannot change from one period to the next. 
B)  The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C)  Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D)  Both a discount rate for computing NPV cannot change from one period to the next and discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
A)  A discount rate for computing NPV cannot change from one period to the next. 
B)  The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C)  Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D)  Both a discount rate for computing NPV cannot change from one period to the next and discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

Accepted Answer

A) True 
 B)False

Question 20

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

Accepted Answer

A)  Audit risk 
B)  Tax law uncertainty 
C)  Financial risk 
D)  Marginal tax rate uncertainty 
A)  Audit risk 
B)  Tax law uncertainty 
C)  Financial risk 
D)  Marginal tax rate uncertainty

Which of the following statements about tax minimization is true?

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Which of the following statements about discount rates is true?

The tax law prohibits related party transactions.

The tax cost of a transaction represents a cash inflow.

The tax savings from a transaction represents a cash inflow.

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

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.

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

Which of the following statements about public market transactions is true?

Reid Inc. received a $90,000 cash payment, of which only $50,000 was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.

Related party transactions occur in a public market.

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

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

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

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

Which of the following statements about discount rates is false?

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

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

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

Exam 3: Taxes As Transaction Costs

Which of the following statements about tax minimization is true?

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Which of the following statements about discount rates is true?

The tax law prohibits related party transactions.

The tax cost of a transaction represents a cash inflow.

The tax savings from a transaction represents a cash inflow.

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

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.

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

Which of the following statements about public market transactions is true?

Reid Inc. received a $90,000 cash payment, of which only $50,000 was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.

Related party transactions occur in a public market.

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

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

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

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

Which of the following statements about discount rates is false?

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

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

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