Exam 3: Taxes As Transaction Costs

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.

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

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

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

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

The arm's length transaction presumption:

Mr. Basel made an investment that will generate the following cash flows over a three-year period. Year 0 Year 1 Year 2 Taxable revenue 16,000 23,000 33,000 Deductible expenses (5,000) (6,000) (7,500) Nondeductible expenses (1,200) (2,000) (4,300) If Mr. Basel's marginal tax rate over the three year period is 20% and he uses a 6% discount rate, compute the NPV of the transaction.

TallBoy Inc. is a local furniture manufacturer and Leley Company is a retail furniture store. The two companies have no owners in common. Leley recently negotiated to purchase $845,000 of furniture from TallBoy. This purchase is an example of a/an:

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?

Which of the following statements concerning related party transactions is false?

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?

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?

Which of the following statements about discount rates is false?

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

The tax savings from a transaction represents a cash inflow.

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

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?

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.

Holter Inc. owns an investment that generated $120,000 cash revenue and required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. Which of the following statements is false?