Ch 3 Textbook Answers(1)

Ch 3 Textbook Answers(1) - Questions and Problems for...

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Questions and Problems for Discussion 1. Net present value (NPV) of a stream of future cash flows decreases as the discount rate increases. 2. A dollar that certainly will be received at a future date is worth more in present value terms than a dollar the receipt of which is uncertain (i.e., subject to some degree of financial risk). Therefore, the present value of a certain stream of cash flows should be based on a smaller discount rate than the present value of a risky stream of cash flows. 3. The after-tax cost of a deductible expense decreases as the taxpayer’s marginal rate increases. 4. Firm A has a higher marginal tax rate than Firm Z. Consequently, Firm A’s after-tax cost of the expense is less than Firm Z’s and low enough to justify the expenditure. 5. Before-tax cost and after-tax cost of an expenditure are equal when the expenditure does not result in a current or future tax benefit. 6. If the tax laws apply in a uniform manner to both business opportunities (e.g., the same marginal rate applies to the income from each) and the tax laws and rates are stable over the five-year period, tax cost is a neutral factor. 7. Assumptions based on new tax rules and regulations, which may or may not stand the test of time, are more uncertain than assumptions based on enduring provisions of the federal tax law. 8. Provisions relating to the proper measurement of taxable income are more likely to be part of the fundamental structure of the law than provisions designed to affect economic behavior. The latter reflect fiscal policies that may change with each new Congress or Presidential administration. Consequently, they are less stable and more uncertain than provisions relating to income measurement. 9. In the U.S. tax system, the burden of proof with respect to any factual issue is on the IRS if the taxpayer can present credible evidence concerning the facts, meets any substantiation requirements, and has cooperated with the IRS in establishing the facts of the case. This rule does not apply to corporations, trusts, and partnerships with net worth in excess of $7 million. For these entities, the burden of proof in a tax dispute is on the entity. 10. Congress may have enacted legislation that changed the tax rates for all taxpayers (a statutory rate change). Alternatively, the firm’s taxable income for the year may be higher or lower than projected, thus moving the firm into a different tax bracket. 11. This transaction is taking place in a private market because purchaser and seller are negotiating directly and the terms of the transaction are customized and, therefore, unique to this transaction. 12. a. Because Corporation P owns a controlling stock interest in Corporation R, the two corporations are related parties and may not have dealt at arm’s length in establishing the $250,000 fee for the employee services. b.
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This note was uploaded on 07/19/2011 for the course ACCT 3220 taught by Professor Xiaoliyuan during the Fall '09 term at CSU East Bay.

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Ch 3 Textbook Answers(1) - Questions and Problems for...

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