Question 1

If a firm finances investment by selling equity,which statement is TRUE?

Accepted Answer

When a firm finances investment by selling equity, it has the choice of paying dividends or retaining earnings for reinvestment. This is in contrast to debt financing, where interest and principal payments must be made regardless of the firm's profitability. Additionally, option A is incorrect as equity holders are not entitled to their share of profits until all other obligations (such as debt payments) have been met. Option B is incorrect as corporations are required to pay corporate taxes on their profits, regardless of how those profits are distributed. Option D is also incorrect as there are significant differences between equity and debt financing in areas such as risk, cost, and control.

Question 2

Allowing the deduction of depreciation allowances ___________ for a given level of investment; taxing corporate investment ___________ for a given level of investment.

Accepted Answer

Allowing the deduction of depreciation allowances lowers the marginal cost of investment because it reduces the taxable income of a company, thereby reducing the amount of tax payable. Taxing corporate investment, on the other hand, lowers the marginal benefit of investment because the after-tax return on investment is reduced.

Question 3

Because the demand for the products produced by corporations is not likely to be perfectly elastic,it is likely that a tax on corporate profit will result in:

Accepted Answer

If the demand for the products produced by corporations is not perfectly elastic, then corporations will not be able to pass on the entire tax burden to consumers in the form of higher prices. Instead, they will have to absorb some of the tax themselves, which will reduce their profits. To maintain their profit margins, corporations may also raise prices, which will shift some of the tax burden onto consumers. Therefore, a tax on corporate profit is likely to result in higher product prices, causing some of the tax burden to fall on consumers.

Question 4

Which of the following statements is TRUE?

Accepted Answer

Investors may prefer dividends despite the tax inefficiency due to the agency problem, where they believe that if cash is left in the hands of management, it might not be allocated in the most efficient manner. Dividends provide a way for shareholders to receive a return on their investment directly, reducing the risk of inefficient capital use by the company's management.

Question 5

Under current tax law,U.S.corporations are:

Accepted Answer

Under current tax law, U.S. corporations are permitted to claim tax payments to foreign governments as a credit against U.S. taxes. This is known as foreign tax credit and helps to avoid double taxation on the same income.

Question 6

If a firm finances investment by selling bonds,then the:

Accepted Answer

Bondholders pay personal income tax on the interest they receive because it is considered as income to them. The firm does not pay corporate tax on the amount they repay to the bondholders, but they do deduct the interest paid as an expense on their income statement, which reduces their taxable income.

Question 7

If corporations bear at least some of the tax burden when profits are taxed,this means that workers are likely to bear some of the burden through:

Accepted Answer

When corporations bear some of the tax burden, they may pass on some of the costs to workers through lower wages if there is not enough elasticity in the labor supply. This is because the workers are less able to negotiate higher wages if there are fewer options for employment. If the labor supply is perfectly elastic, workers can easily find alternatives and employers cannot afford to lower wages. So, higher wages are only likely if there is enough elasticity in the labor market.

Question 8

Which of the following groups is unlikely to bear the burden of a corporate tax in the long run?

Accepted Answer

The answer of Which of the following groups is unlikely...

Question 9

What is the effective corporate tax rate when the value of the tax credit for each dollar of investment is $0.25,the tax rate on earnings minus labor is 35%,and the present discounted value of a $1 investment is $0.50?

Accepted Answer

The effective corporate tax rate is calculated as the statutory tax rate minus the value of the tax credit divided by the present value of the investment. Here, it is 35% - ($0.25 / $0.50) = -11.53%.

Question 10

Which statement about the benefits of an investment is generally assumed to be TRUE in economic models?

Accepted Answer

In economic models, the assumption is generally that the marginal product of capital is diminishing. This means that as more capital is invested, the benefit gained from each additional unit of investment decreases. This is because there may be limits to how efficiently the capital can be used.

Question 11

Which kind of depreciation is the TRUE deterioration in the value of capital in each period of time?

Accepted Answer

Economic depreciation reflects the true deterioration in the value of capital in each period of time, taking into account the wear and tear, obsolescence, and other factors that lead to a decrease in the asset's market value. Depreciation credits and allowances are more related to tax and accounting rules, while a depreciation schedule is a plan outlining the timing and amounts of depreciation expenses.

Question 12

U.S.firms are taxed on profits earned in other countries:

Accepted Answer

U.S. firms are generally taxed on their worldwide income, but they are allowed to defer paying taxes on profits earned by their foreign subsidiaries until the income is repatriated, or brought back to the U.S. by the parent company. This means that the profits are subject to U.S. taxes when they are repatriated, but not when they are earned. However, the foreign country may have also taxed the profits, and the U.S. allows a foreign tax credit to offset some or all of the U.S. tax liability. The tax rates on repatriated profits may be at a higher rate than the domestic tax rates.

Question 13

In a world without taxes,suppose that a firm finances an investment through selling equity shares on which it has to pay a dividend per dollar of investment equal to d.The total cost of a $1 investment each period is:

Accepted Answer

The answer of In a world without taxes,suppose that a...

Question 14

Why do governments levy corporate taxes on firms rather than taxing the factors of production that make up those firms? Discuss the two fundamental reasons.

Accepted Answer

The answer of Why do governments levy corporate taxes on...

Question 15

Suppose there is a corporate tax on cash earnings minus labor costs.As a result:

Accepted Answer

The tax reduces the net cash earnings of the firm, which means that the return per dollar of investment per period is smaller for a given level of investment as the tax eats into the profits. This reduces the incentive for firms to invest as their returns are lower.

Question 16

A profit-maximizing corporation would generally prefer _____ to _____.

Accepted Answer

The answer of A profit-maximizing corporation would generally prefer _____...

Question 17

The vast majority of large corporations face which tax rate?

Accepted Answer

The current corporate tax rate in the United States is 21%, but prior to the Tax Cuts and Jobs Act of 2017, it was 35%. Therefore, the vast majority of large corporations face or used to face a 35% tax rate.

Question 18

A positive effective corporate tax rate means that the corporation invests _____ with taxes,deductions,and investment tax credits than it would without them.A negative effective corporate tax rate means that the corporation invests _____ with taxes,deductions,and investment tax credits than it would without them.

Accepted Answer

A positive effective corporate tax rate means the corporation is paying more in taxes, deductions, and investment tax credits than if those factors were not in place. This would result in less investment. A negative effective corporate tax rate means the corporation is paying fewer taxes, deductions, and investment tax credits than if those factors were not in place. This would result in more investment. Therefore, the best choice is C, less investment with a positive effective tax rate, and more investment with a negative effective tax rate.

Question 19

What is the effective corporate tax rate when the value of the tax credit for each dollar of investment is $0,the tax rate on earnings is 35%,and investments are expensed?

Accepted Answer

The answer of What is the effective corporate tax rate...

Question 20

A tax system in which corporations are taxed by their home countries on their income regardless of where it is earned is called a ________ tax system.The United States uses a _______ tax system.

Accepted Answer

A global tax system taxes corporations on their worldwide income, regardless of where it is earned. The United States uses a global tax system.

Quiz 24: Taxation of Business Income