Exam 19: The Corporation Tax

Economic depreciation is

When one company is owned by a corporation but is chartered separately from the parent company,this is

U.S.multinational corporations are allowed tax _________ for taxes paid to foreign governments.

The excess burden of the corporate income tax is

Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.

Stockholders have limited liability for the acts of the corporation for which they hold stock.

Large firms sometimes have manufacturing and development that take place in multiple states.Should they be subject to taxation in every state in which they do business?

Oxnard Rims,Inc.,has $5 million in assets and $2 million in debt.During the course of the year,it takes in $1 million in net revenue after deduction of all costs (except for interest)and incurs interest expenses of $500,000.Oxnard Rims,Inc.,pays an average tax rate of 35% on its profit. Calculate the percentage return on equity after taxes for the corporation. If the market interest rate is 12.5%,do you think Oxnard Rims pleased its investor for the preceding year?

There are circumstances under which the corporation tax is equivalent to an economic profits tax.

Assume that the user cost of capital (C)is simply $C = \frac { ( r + \delta ) } { ( 1 - \Theta ) ( 1 - t ) }$ where r is the after tax rate of return,δ is the depreciation rate,Θ is the corporate tax rate and,r is the individual tax rate.Now assume further that the after-tax rate of return is 10 percent and the economic depreciation rate is 2 percent.The firm faces corporate taxes of 35 percent with an individual tax rate of 25 percent.Suppose that we now know that the present value of depreciation allowances is 0.20.In addition,there is an investment tax credit of 0.10.What effect does this new information have on the user cost of capital?

For corporate taxes,the lowest tax bracket is

The ABC Corporation is contemplating purchasing a new computer system that would yield a before-tax return of 30 percent.The system would depreciate at a rate of 3 percent per year.The after-tax interest rate is 11 percent,the corporation tax rate is 35 percent,and a typical shareholder of ABC has a marginal tax rate of 30 percent.Assume for simplicity that there are no depreciation allowances or investment tax credits.Do you expect ABC to buy the new computer system?

Firms deducting the asset's full cost at the time of acquisition from taxable income is called investment tax credit.