Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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 D

Question 3

The tax law prohibits related party transactions.

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A) If the expense is nondeductible, Ms.Teague's after-tax cost is zero. 
B) If the expense is deductible, Ms.Teague's after-tax cost is $28,000. 
C) If only $17,500 of the expense is deductible, Ms.Teague's after-tax cost is $14,000. 
D) Statements A.and B.are true. 
A) If the expense is nondeductible, Ms.Teague's after-tax cost is zero. 
B) If the expense is deductible, Ms.Teague's after-tax cost is $28,000. 
C) If only $17,500 of the expense is deductible, Ms.Teague's after-tax cost is $14,000. 
D) Statements A.and B.are true.

Question 6

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.

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 7

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 8

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?

Accepted Answer

A) Ms.Leik's annual after-tax cash flow from this investment is $3,520. 
B) If the interest is taxable but the expense is not deductible, Ms.Leik's annual after-tax cash flow from the investment is $3,400. 
C) If the interest is tax-exempt and the expense is not deductible, Ms.Leik's annual after-tax cash flow is $5,000. 
D) None of the above is true. 
A) Ms.Leik's annual after-tax cash flow from this investment is $3,520. 
B) If the interest is taxable but the expense is not deductible, Ms.Leik's annual after-tax cash flow from the investment is $3,400. 
C) If the interest is tax-exempt and the expense is not deductible, Ms.Leik's annual after-tax cash flow is $5,000. 
D) None of the above is true.

Question 9

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 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

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 12

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 13

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

Accepted Answer

A) $14,018 
B) $14,623.35 
C) $15,647.25 
D) None of the above 
A) $14,018 
B) $14,623.35 
C) $15,647.25 
D) None of the above

Question 14

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

Accepted Answer

A) $93,075 
B) $88,650 
C) $81,445.50 
D) None of the above 
A) $93,075 
B) $88,650 
C) $81,445.50 
D) None of the above

Question 15

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 16

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Accepted Answer

A) Prohibited transaction 
B) Public market transaction 
C) Related party transaction 
D) Arm's length transaction 
A) Prohibited transaction 
B) Public market transaction 
C) Related party transaction 
D) Arm's length transaction

Question 17

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 18

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 19

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 20

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%

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

Arm's length business transactions can occur in:

The tax law prohibits related party transactions.

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

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

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.

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.

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?

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

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

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?

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

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

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):

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

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

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.

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.

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters

Exam 3: Taxes As Transaction Costs

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

Arm's length business transactions can occur in:

The tax law prohibits related party transactions.

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

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

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.

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.

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?

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

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

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?

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

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

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):

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

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

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.

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.

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters