Chap003 - Test Bank Chapter 3, page 1 Chapter 3 Taxes as...

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Unformatted text preview: Test Bank Chapter 3, page 1 Chapter 3 Taxes as Transaction Costs True/False 1. Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction. Answer: True (Easy; LO 1) 2. The present value of a dollar available in a future period increases as the discount rate increases. Answer: False (Medium; LO 1) Feedback: Present value decreases as the discount rate increases. 3. A dollar available today is always worth more than a dollar not available until a future period. Answer: True (Easy; LO 1) 4. A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity. Answer: True (Easy; LO 1) 5. 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. Answer: True (Medium; LO 1) 6. The tax cost of a transaction represents a cash inflow. Answer: False (Easy; LO 1) 7. The tax savings from a transaction represents a cash inflow. Answer: True (Easy; LO 1) 8. Every business transaction results in a current tax cost or tax savings. Answer: False (Medium; LO 1) Feedback: Many business transactions have no current tax consequence and therefore do not result in a tax cost or tax savings. 9. The tax cost of a transaction depends on the taxpayers average tax rate for the year. Test Bank Chapter 3, page 2 Answer: False (Medium; LO 1) Feedback: The tax cost depends on the taxpayers marginal tax rate. 10. The tax cost of an income-generating transaction increases as the taxpayers marginal tax rate increases. Answer: True (Easy; LO 1) 11. The tax savings from a deduction decreases as the taxpayers marginal tax rate increases. Answer: False (Easy; LO 1) 12. A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate. Answer: True (Medium; LO 1) 13. The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal. Answer: True (Medium; LO 2) 14. A taxpayers marginal tax rate and discount rate are independent variables in the NPV calculation. Answer: True (Difficult; LO 2) 15. When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings. Answer: False (Medium; LO 2) 16. Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayers tax treatment on audit. Answer: False (Medium; LO 3) 17. Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income. Answer: True (Medium; LO 3) 18. A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction....
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Chap003 - Test Bank Chapter 3, page 1 Chapter 3 Taxes as...

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