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.

The present value of a dollar available in a future period increases as the discount rate increases.

Wilson Company has $100,000 in an investment paying 6 percent per annum. Each year Wilson incurs $1,200 of expenses related to this investment. Compute Wilson's annual net cash flow from this investment assuming the following. A. Wilson's marginal tax rate is 10 percent and the annual expense is not deductible. B. Wilson's marginal tax rate is 35 percent and the annual expense is deductible. C. Wilson's marginal tax rate is 25 percent and one-half of the annual expense is deductible.

Private market transactions create an opportunity for bilateral tax planning.

When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:

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.

Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement. Compute the NPV of the revenue if Citran will receive $35,000 cash immediately (year 0), $35,000 cash next year (year 1) and $80,000 cash the following year (year 2). Citran will report the revenue as taxable income in the year received. Its marginal tax rate is 30%, and it uses an 8% discount rate.

A dollar available today is always worth more than a dollar not available until a future period.

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.

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.

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?

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.

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

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

Omar Inc. paid a $24,000 expense, only $10,000 of which was deductible. Which of the following statements is false?

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?

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

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?

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

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