Question 1

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 C

Question 2

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. B

Question 3

Wilson Company has $100,000 in an investment paying 6% per annum.Each year Wilson incurs $1,200 of expenses related to this investment.Compute Wilson's annual net cash flow from this investment assuming the following.
A.Wilson's marginal tax rate is 10% and the annual expense is not deductible.
B.Wilson's marginal tax rate is 35% and the annual expense is deductible.
C.Wilson's marginal tax rate is 25% and one-half of the annual expense is deductible.

Accepted Answer

A.After-tax cash flow is $4,200 = $6,000 − $1,200 − 10% × $6,000.B.After-tax cash flow is $3,120 = $6,000 − $1,200 − 35% × ($6,000 − $1,200).C.After-tax cash flow is $3,450 = $6,000 − $1,200 − 25% × ($6,000 − 50% × $1,200).

Question 4

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A.     If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

Accepted Answer

A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above. 
A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above.

Question 5

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 6

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 the above is 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 the above is true.

Question 7

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 8

Use Appendix A of your textbook provided to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

Accepted Answer

A) $8,745.50 
B) $9,337.50 
C) $9,900.00 
D) None of the above 
A) $8,745.50 
B) $9,337.50 
C) $9,900.00 
D) None of the above

Question 9

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 10

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 11

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

Accepted Answer

A) $23,000 
B) $24,050 
C) $37,000 
D) None of the above. 
A) $23,000 
B) $24,050 
C) $37,000 
D) None of the above.

Question 12

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 13

Ms.Lenz has $100,000 in an investment paying 9% annual interest.Her marginal tax rate is 25%.Which of the following statements is false?

Accepted Answer

A) Ms.Lenz's annual before-tax cash flow from this investment is $9,000. 
B) If the interest is tax-exempt,Ms.Lenz's annual after-tax cash flow is $9,000. 
C) If the interest is taxable,Ms.Lenz's annual after-tax cash flow is $6,750. 
D) None of the above is false. 
A) Ms.Lenz's annual before-tax cash flow from this investment is $9,000. 
B) If the interest is tax-exempt,Ms.Lenz's annual after-tax cash flow is $9,000. 
C) If the interest is taxable,Ms.Lenz's annual after-tax cash flow is $6,750. 
D) None of the above is false.

Question 14

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 15

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.

Accepted Answer

A) $61,453 
B) $52,771 
C) $47,781 
D) None of the above. 
A) $61,453 
B) $52,771 
C) $47,781 
D) None of the above.

Question 16

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 17

The arm's length transaction presumption is unreliable for transactions between related parties.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

Accepted Answer

A) Audit risk 
B) Tax law uncertainty 
C) Business risk 
D) None of the above 
A) Audit risk 
B) Tax law uncertainty 
C) Business risk 
D) None of the above

Question 20

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

Accepted Answer

A) True 
 B)False

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.

Which of the following statements about discount rates is true?

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A. If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

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

Related party transactions occur in a public market.

Use Appendix A of your textbook provided to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

Which of the following statements about discount rates is false?

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.

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Ms.Lenz has $100,000 in an investment paying 9% annual interest.Her marginal tax rate is 25%.Which of the following statements is false?

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:

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.

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

The arm's length transaction presumption is unreliable for transactions between related parties.

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

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

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

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

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.

Which of the following statements about discount rates is true?

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A. If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

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

Related party transactions occur in a public market.

Use Appendix A of your textbook provided to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

Which of the following statements about discount rates is false?

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.

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Ms.Lenz has $100,000 in an investment paying 9% annual interest.Her marginal tax rate is 25%.Which of the following statements is false?

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:

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.

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

The arm's length transaction presumption is unreliable for transactions between related parties.

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

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

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

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