Exam 3: Taxes As Transaction Costs

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

Ms. Owen purchased 2,000 shares of General Electric common stock through her broker. This purchase is an example of a:

Which of the following statements about marginal tax rates is false?

Which of the following is not a related party transaction?

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

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

The tax savings from a transaction represents a cash inflow.

Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Which opportunity should Borden choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV?

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?

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

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

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

Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:

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.

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

The tax cost of a transaction represents a cash inflow.

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

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?