Question 1

Tanner holds a 7% interest-bearing debt instrument in Eve Co.Eve Co.'s tax rate is 13% and Tanner is in a 45% tax bracket.
Required:

A) Calculate the after-tax cost of the debt-instrument to Eve Co.
B) Calculate the after-tax value of the interest for Tanner.

A) .07 * (1-.13) = 6.09%
B) .07 * (1-.45) = 3.85%

Accepted Answer

A) .07 * (1-.13) = 6.09%&#10;B) .07 * (1-.45) = 3.85%

Question 2

Two investor corporations may not enter jointly into which of the following?&#10;A)Joint venture&#10;B)Partnership&#10;C)Separate corporation&#10;D)Proprietorship

Accepted Answer

Two investor corporations may not enter into a proprietorship as a proprietorship is a business owned and operated by one individual or entity.

Question 3

Jamie is an employee at ABC Ltd.and is in a 45% tax bracket.ABC Ltd.has a tax rate of 27%.The company has offered Jamie a 10% pay raise.Jamie's current salary is $50,000.
Required:

A) Calculate the after-tax cost of the raise to the ABC Ltd.
B) Calculate the after-tax value of the raise for Jamie.
Show all calculations.

A) After-tax cost to ABC Ltd.: ($50,000 * 10%) * (1 - .27) = $3,650
B) After-tax value for Jamie: ($50,000 * 10%) * (1 - .45) = $2,750

Accepted Answer

A) After-tax cost to ABC Ltd.: ($50,000 * 10%) * (1 - .27) = $3,650&#10;B) After-tax value for Jamie: ($50,000 * 10%) * (1 - .45) = $2,750

Question 4

Which of the following statements is true?&#10;A)Dividends paid by a corporation are deductible by that corporation and are a form of property income for the recipient.&#10;B)Dividends paid by a corporation are deductible by that corporation and are a form of business income for the recipient.&#10;C)Dividends paid by a corporation are not deductible by that corporation and are a form of business income for the recipient.&#10;D)Dividends paid by a corporation are not deductible by that corporation and are a form of property income for the recipient.

Accepted Answer

Dividends paid by a corporation are not deductible by that corporation and are a form of property income for the recipient. This means that the corporation cannot deduct dividends paid to its shareholders as an expense on its tax return. Instead, dividends received by shareholders are taxed as property income on their individual tax returns.

Question 5

Income tax is calculated for which of the following jurisdictional groups?&#10;A)Municipal, provincial, and federal&#10;B)Municipal, federal, and foreign&#10;C)Provincial, federal, and foreign&#10;D)Municipal, provincial, and foreign

Accepted Answer

Income tax is typically calculated for provincial, federal, and foreign jurisdictions. These entities have the authority to levy taxes on income, whereas municipal governments usually do not impose income taxes directly.

Question 6

Which of the following statements is false?&#10;A)Cash flow should be calculated on an after-tax basis.&#10;B)The tax cost to a business should not be regarded as a cost of doing business.&#10;C)Income tax should be treated as a controllable cost.&#10;D)The value of an enterprise should not be based on pre-tax cash flow.

Accepted Answer

The tax cost is a necessary cost of doing business and should be considered in financial analysis.

Question 7

When assessing the value of a corporation, the most relevant information that decision-makers normally consider is&#10;A)the potential for before-tax profits.&#10;B)the potential for after-tax profits.&#10;C)the current corporate tax rate.&#10;D)cash flow before-tax.

Accepted Answer

Decision-makers typically consider the potential for after-tax profits as the most relevant information when assessing the value of a corporation. This is because it reflects the actual amount of money that the corporation can generate for its investors and shareholders after accounting for taxes. Other factors, such as potential before-tax profits or current corporate tax rates, may also be important, but they are typically secondary to the potential for after-tax profits. Cash flow before-tax may also be relevant, but it does not necessarily reflect the profitability of the corporation after accounting for taxes and other expenses.

Question 8

Which of the following attitudes and actions is most likely to help decision-makers develop an efficient approach to taxation?&#10;A)Cash flows should be considered from a before-tax perspective when making decisions.&#10;B)Functional managers should not be held responsible for the tax effects of decisions within their divisions.&#10;C)Tax costs to a business should be regarded as controllable expenses, much like product costs and selling costs.&#10;D)All managers should own a copy of the Income Tax Act.

Accepted Answer

Considering tax costs as controllable expenses will encourage decision-makers to seek more efficient ways of managing taxes, ultimately leading to an efficient approach to taxation. Option A is incorrect because decision-makers need to consider tax implications when making decisions. Option B is incorrect because functional managers should be held responsible for the tax effects of decisions within their divisions. Option D is not necessarily relevant as owning the Income Tax Act does not necessarily lead to an efficient approach to taxation.

Question 9

Which of the following is not considered to be a separate entity for tax purposes in Canada?&#10;A)An individual&#10;B)A proprietorship&#10;C)A corporation&#10;D)A trust

Accepted Answer

Proprietorship is not a separate legal entity for tax purposes in Canada, unlike corporations and trusts. Income from a proprietorship is taxed as the personal income of the owner.

Question 10

Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''.

Accepted Answer

The answer of Explain what is meant by the statement...

Question 11

The text book lists four fundamental tax variables which a manager needs to consider when making business decisions.These variables are: 1) primary types of income; 2) entities subject to taxation on income; 3) alternative forms of business and investing structures used by taxable entities structure; and 4) tax jurisdictions.List the relevant variables within these four categories.

Accepted Answer

The answer of The text book lists four fundamental tax...

Question 12

Logan holds a 7% interest-bearing debt instrument in Glow Co.Glow Co.'s tax rate is 27% and Logan is in a 45% tax bracket.Which of the following statements is correct?&#10;A)The after-tax cost of the debt instrument is 5.11% to Glow Co.and the after-tax value to Logan is 3.85%.&#10;B)The after-tax cost of the debt instrument is 5.11% to Glow Co.and the after-tax value to Logan is 3.15%.&#10;C)The after-tax cost of the debt instrument is 1.89% to Glow Co.and the after-tax value to Logan is 3.15%.&#10;D)The after-tax cost of the debt instrument is 7% to Glow Co.and the after-tax value to Logan is 7%.

Accepted Answer

The answer of Logan holds a 7% interest-bearing debt instrument...

Question 13

Blake holds a 5% interest-bearing debt instrument in Day Co.Day Co.'s tax rate is 27% and Blake is in a 50% tax bracket.
Required:

A) Calculate the after-tax cost of the debt-instrument to Day Co.
B) Calculate the after-tax value of the interest for Blake.

Accepted Answer

The answer of Blake holds a 5% interest-bearing debt instrument...

Deck 1: Taxationits Role in Decision Making