Question 1

Reid Inc. received a $90,000 cash payment, only $50,000 of which 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 the above 
A)  $54,000 
B)  $50,000 
C)  $30,000 
D)  None of the above

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Accepted Answer

A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax cost of the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true. 
A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax cost of the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true.

Question 8

Which of the following statements about different tax rates over time is false?

Accepted Answer

A)  A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B)  Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C)  A NPV calculation must assume a constant tax rate for all future periods. 
D)  A firm's future tax rate may change because of increases or decreases in future taxable income. 
A)  A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B)  Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C)  A NPV calculation must assume a constant tax rate for all future periods. 
D)  A firm's future tax rate may change because of increases or decreases in future taxable income.

Question 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  The modification will increase the NPV of the transaction by $50,000. 
B)  The modification may affect the transaction's before-tax cash flows. 
C)  The modification may reduce the tax cost but increase one or more nontax costs. 
D)  The modification may not be desirable even though it reduces the tax cost. 
A)  The modification will increase the NPV of the transaction by $50,000. 
B)  The modification may affect the transaction's before-tax cash flows. 
C)  The modification may reduce the tax cost but increase one or more nontax costs. 
D)  The modification may not be desirable even though it reduces the tax cost.

Question 12

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. 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 13

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Accepted Answer

A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above 
A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above

Question 14

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 15

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 16

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 17

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Accepted Answer

A)  If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B)  If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C)  If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D)  None of the above is false. 
A)  If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B)  If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C)  If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D)  None of the above is false.

Question 18

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 19

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year } ~ \
\hline \text { Taxeble revenue } & 30,000 & 45,000 & 70,000 \
\hline \text { Deductible expenses } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline \text { Nandeductible expenses } & ( 1,000 ) & ( 4,000 ) & \text { (10,000) } \
\hline
\end{array}$$ 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 20

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

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

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

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

Which of the following statements about tax minimization is true?

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

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Which of the following statements about different tax rates over time is false?

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

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

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

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

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?

Which of the following statements about discount rates is true?

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

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

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.

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:

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

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

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

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

Which of the following statements about tax minimization is true?

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

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Which of the following statements about different tax rates over time is false?

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

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

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

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

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?

Which of the following statements about discount rates is true?

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

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

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.

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:

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