Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 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

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

Accepted Answer

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

Question 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  Public market transaction 
B)  Fictitious market transaction 
C)  Private market transaction 
D)  Related party transaction 
A)  Public market transaction 
B)  Fictitious market transaction 
C)  Private market transaction 
D)  Related party transaction

Question 11

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.

Accepted Answer

The NPV is $95,155 ($24,500 af

Question 12

The arm's length transaction presumption:

Accepted Answer

A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions. 
A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions.

Question 13

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 14

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

Accepted Answer

A)  The federal tax law prohibits related party transactions. 
B)  Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C)  Related party transactions can never reflect an arm's length standard. 
D)  The IRS always disallows any favorable tax consequences of related party transactions. 
A)  The federal tax law prohibits related party transactions. 
B)  Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C)  Related party transactions can never reflect an arm's length standard. 
D)  The IRS always disallows any favorable tax consequences of related party transactions.

Question 15

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

Accepted Answer

A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Both a taxpayer's marginal rate does not change over time and, as the marginal rate decreases, the after-tax cost of a deductible expense increases. 
A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Both a taxpayer's marginal rate does not change over time and, as the marginal rate decreases, the after-tax cost of a deductible expense increases.

Question 16

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

Accepted Answer

A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increase, the tax savings from a deduction increases. 
A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increase, the tax savings from a deduction increases.

Question 17

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 18

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:

Accepted Answer

A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Question 19

Private market transactions create an opportunity for bilateral tax planning.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

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

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

Which of the following statements about discount rates is true?

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.

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

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

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

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

The arm's length transaction presumption:

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.

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

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

Which of the following statements about marginal tax rates 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?

Private market transactions create an opportunity for bilateral tax planning.

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

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

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

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

Which of the following statements about discount rates is true?

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.

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

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

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

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

The arm's length transaction presumption:

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.

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

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

Which of the following statements about marginal tax rates 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?

Private market transactions create an opportunity for bilateral tax planning.

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

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