Question 1

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 2

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 3

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 the above is 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 the above is false.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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?

Accepted Answer

A)  If only $52,000 of the revenue is taxable, but all the expenses are deductible, the Deans' after-tax cash flow is $40,000. 
B)  If the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625. 
C)  The Deans' before-tax cash flow is $48,000. 
D)  Statements B. and C. are true. 
A)  If only $52,000 of the revenue is taxable, but all the expenses are deductible, the Deans' after-tax cash flow is $40,000. 
B)  If the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625. 
C)  The Deans' before-tax cash flow is $48,000. 
D)  Statements B. and C. are true.

Question 6

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

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 7

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 8

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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(n):

Accepted Answer

A)  Related party transaction 
B)  Public market transaction 
C)  Arm's length transaction 
D)  None of the above 
A)  Related party transaction 
B)  Public market transaction 
C)  Arm's length transaction 
D)  None of the above

Question 15

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period.   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 16

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 17

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Accepted Answer

A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Question 18

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The tax cost of a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Which of the following statements about discount rates is true?

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.

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

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

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?

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

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

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

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 statement about private market transactions is false?

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(n):

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. 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.

Arm's length business transactions can occur in:

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

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

The tax cost of a transaction represents a cash inflow.

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 discount rates is true?

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.

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

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

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?

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

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

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

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 statement about private market transactions is false?

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(n):

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. 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.

Arm's length business transactions can occur in:

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

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

The tax cost of a transaction represents a cash inflow.

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