Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Every business transaction results in a current tax cost or tax savings.

Accepted Answer

A) True 
 B)False

Question 3

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

Wilson Company has $100,000 in an investment paying 6% 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% and the annual expense is not deductible.
B. Wilson's marginal tax rate is 35% and the annual expense is deductible.
C. Wilson's marginal tax rate is 25% and one-half of the annual expense is deductible.

Accepted Answer

A. After-tax cash flow is $4,200 = $6,00

Question 8

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 9

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 10

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 11

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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

Accepted Answer

A)  If Omar's marginal tax rate is 10%, the after-tax cost of the expense is $9,000. 
B)  Regardless of Omar's marginal tax rate, the before-tax cost of the expense is $24,000. 
C)  If Omar's marginal tax rate is 30%, the after-tax cost of the expense is $21,000. 
D)  The after-tax cost of the expense depends on Omar's marginal tax rate. 
A)  If Omar's marginal tax rate is 10%, the after-tax cost of the expense is $9,000. 
B)  Regardless of Omar's marginal tax rate, the before-tax cost of the expense is $24,000. 
C)  If Omar's marginal tax rate is 30%, the after-tax cost of the expense is $21,000. 
D)  The after-tax cost of the expense depends on Omar's marginal tax rate.

Question 14

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 15

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Accepted Answer

A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above 
A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above

Question 16

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.

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
A)  15% 
B)  20% 
C)  25% 
D)  30%

Question 17

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 18

The tax cost of a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 19

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/an:

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 20

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

Accepted Answer

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

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

Every business transaction results in a current tax cost or tax savings.

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Which of the following statements about tax minimization is true?

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:

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

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.

Which of the following statement about private market transactions is false?

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.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

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.

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

Related party transactions occur in a public market.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Arm's length business transactions can occur in:

The tax cost of a transaction represents a cash inflow.

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/an:

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

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

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

Every business transaction results in a current tax cost or tax savings.

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Which of the following statements about tax minimization is true?

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:

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

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.

Which of the following statement about private market transactions is false?

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.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

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.

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

Related party transactions occur in a public market.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Arm's length business transactions can occur in:

The tax cost of a transaction represents a cash inflow.

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/an:

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

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