Question 1

Arm's length business transactions can occur in:

Accepted Answer

A) Private markets 
B) Public markets 
C) Fictitious markets 
D) Both private and public markets 
A) Private markets 
B) Public markets 
C) Fictitious markets 
D) Both private and public markets

Question 2

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:

Accepted Answer

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

Question 3

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.

Accepted Answer

A) $94,129 
B) $84,964 
C) $62,373 
D) None of the above. 
A) $94,129 
B) $84,964 
C) $62,373 
D) None of the above.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) A taxpayer's marginal rate does not change over time. 
B) As the marginal rate decreases,the after-tax cost of a deductible expense increases. 
C) As the marginal rate decreases,the after-tax value of an income-generating transaction increases. 
D) Both a taxpayer's marginal rate does not change over time and,as the marginal rate decreases,the after-tax cost of a deductible expense increases. 
A) A taxpayer's marginal rate does not change over time. 
B) As the marginal rate decreases,the after-tax cost of a deductible expense increases. 
C) As the marginal rate decreases,the after-tax value of an income-generating transaction increases. 
D) Both a taxpayer's marginal rate does not change over time and,as the marginal rate decreases,the after-tax cost of a deductible expense increases.

Question 6

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

Accepted Answer

A) Public market transaction 
B) Fictitious market transaction 
C) Private market transaction 
D) Related party transaction 
A) Public market transaction 
B) Fictitious market transaction 
C) Private market transaction 
D) Related party transaction

Question 7

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs,the decision increases:

Accepted Answer

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

Question 8

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 should Borden choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV?

Accepted Answer

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

Question 9

Mr.Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3.Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

Accepted Answer

A) $259,185 
B) $277,348 
C) $290,310 
D) None of the above 
A) $259,185 
B) $277,348 
C) $290,310 
D) None of the above

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

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?

Accepted Answer

A) If the cash flow is not taxable income,the before-tax and after-tax cash flows from the transaction are equal. 
B) If the cash flow is not taxable income,the NPV of the transaction is $30,000. 
C) Mr.Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D) None of the above is true. 
A) If the cash flow is not taxable income,the before-tax and after-tax cash flows from the transaction are equal. 
B) If the cash flow is not taxable income,the NPV of the transaction is $30,000. 
C) Mr.Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D) None of the above is true.

Question 12

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 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

Yawl Inc.must choose between two business opportunities.Opportunity 1 will generate $40,000 before-tax cash flow in years 0,1,and 2,with a $7,000 annual tax cost.
Opportunity 2 will also generate $40,000 before-tax cash flow in years 0,1,and 2.However,the tax cost will be $15,000 in year 0,$2,500 in year 2,and $2,500 in year 3.Use Appendix A to determine which opportunity should Yawl choose if it uses a 6% discount rate to compute NPV?

Accepted Answer

Opportunity 1 has a $93,489 NPV ($33,000

Question 16

Mr.Basel made an investment that will generate the following cash flows over a three-year period.Use Appendix A.

Accepted Answer

A) $30,028 
B) $33,557 
C) $39,781 
D) None of the above. 
A) $30,028 
B) $33,557 
C) $39,781 
D) None of the above.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Accepted Answer

A) True 
 B)False

Question 20

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 the above is 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 the above is false.

Arm's length business transactions can occur in:

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.

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

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

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs,the decision increases:

Mr.Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3.Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

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

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 tax minimization is true?

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

Mr.Basel made an investment that will generate the following cash flows over a three-year period.Use Appendix A.

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

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.

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

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?

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

Arm's length business transactions can occur in:

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.

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

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

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs,the decision increases:

Mr.Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3.Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

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

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 tax minimization is true?

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

Mr.Basel made an investment that will generate the following cash flows over a three-year period.Use Appendix A.

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

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.

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

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?

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