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Questions and Answers of
Corporate Finance
For the hypothetical income tax rate structure defined in the chapter, compute the tax liability and the average tax rate for each of the following taxable incomes: a. $10,000 b. $29,000 c.
Recompute the income tax liability and the average tax rate for each of the income levels in problem 1, assuming that the first $8,000 of income is exempt from taxation. Explain the effect of the
Recompute the income tax liability and the average tax rate for each of the income levels in problem 1, assuming that there is a $500 tax credit. Explain the effect of the credit on the average tax
Suppose that you are the chairman of the Library Board of Governors in Bookville. Your library system has been authorized by the voters to collect a property tax in order to pay for the services
This problem is an exercise in computing average and marginal tax rates. The objective is to understand the difference between average and marginal rates and further understand the effects of
Consider each of the following deductions currently permitted on the U.S. income tax. Explain whether each would be retained if the tax base were broadened to a Haig-Simon definition of income. a.
Consider each of the following forms of income not presently included in the definition of income used on the U.S. income tax. Explain whether each should be included if the tax base were broadened
True, False, or Uncertain? Explain. a. A tax imposed on a good with zero elasticity of demand has a large excess burden. b. A tax imposed on a good with zero elasticity of supply has no excess
Calculate the excess burden of a tax of 10% for a good with compensated elasticity of demand of 0.5 (in absolute value), a price before tax of $1.00, and a quantity demanded of 1 million units.
In the case of a consumer with a given level of income and the choice of spending that income on commodities X and Y, evaluate whether an excise tax on X or an equal-yield income tax will impose the
If the compensated demand for a single commodity is completely inelastic, the most socially desirable ad valorem tax rate on this commodity will be higher than the tax rates on other commodities.
Use the Ramsey Rule to compare two alternative tax policies. First, suppose that we apply two small taxes applied at the rate t to a commodity. Second, suppose that we apply one tax at the rate 2t
True, False, or Uncertain? (Use graphs to explain.) a. Equal proportional taxes imposed on all market goods have no excess burden. b. A tax on a product with zero elasticity of demand has no excess
Illustrate graphically and discuss the excess burden of each of the following policies, taking into account your estimation of the elasticity of demand or supply that may affect the size of the
Use the expression for excess burden EBx= (.5pxxtx2 )/(1/η +1/ε) (where η is the absolute value of the compensated price elasticity of demand and ε is the supply elasticity) to estimate the
True, False, or Uncertain. Explain. a. Federal deductibility of home mortgage interest payments causes an income effect, but no substitution effect. b. An increase in the income tax rate causes a
Many states have introduced so-called 529 savings plans in recent years in order to encourage families to save money to fund their children’s college education. Under these plans a family can set
President Bush’s income tax cuts enacted in 2001 have come under increasing scrutiny due to the federal government’s subsequent budget situation with an anticipated deficit for the next several
Suppose that Hudson Meats, Inc. is engaged in the business activity of supplying hamburger patties to major U.S. fast food chains. A new business opportunity is presented to the firm. They have the
True, False, or Uncertain? Explain. A person who reacts to a reduction in a proportional income tax by saving more has an income effect that is larger than her substitution effect. (graph required)
Mortgage interest paid by a homeowner is deductible but consumer credit interest paid on a car loan is not deductible under current income tax law in the United States. Draw a diagram like Figure
The labor/leisure choice model discussed in this chapter presumes that there is just one source of income: labor income. Explain how the graphical model would be altered to include a secondary source
The life cycle model discussed in this chapter presumes that the income tax system taxes interest income received by savers and permits deductibility of interest paid by borrowers. Suppose that the
Suppose that the demand for a good is given by the inverse demand function: p =0 - 3q.a. Plot the demand curve on a graph.b. Compute the price at which 2 units of the good will be demanded.c. Suppose
Suppose that the demand for a good is given by the inverse demand function p = 10 - 3q while the supply of the good is given by the inverse supply function p = 2 + 2q. a. Plot the demand and supply
The food stamp program in the United States provides monthly allotments of food stamps to families of various sizes, based on their income. The following table lists the gross monthly income
Use a labor-leisure choice model such as that developed in Chapter 12 to analyze the incentive effect of government program targeted at low-income households. Suppose, in particular, that the
True, False, or Uncertain? Explain. a. A tax imposed on a good with relatively inelastic demand is borne primarily by the consumer. b. A tax imposed on a good with relatively elastic supply is
The State of Aksarben has a problem. The State Supreme Court has just ruled that the state’s method of taxing property is unconstitutional. Rather than suffer the revenue shortfall that would occur
Senator Beatrice is concerned that one of the state’s major industries, food processing, is hampered by a high rate of taxation applied to capital. She has introduced legislation which would
Iona is a retired school teacher whose pension income is $18,000 per year. She also receives social security income of $12,000 per year. Jay is a young man who does not choose to work. He inherited
For each of the following households, use the tax rate schedules in Table 14.2 to compute liability and average tax rate. a. Miriam is single and has a taxable income of $40,000. b. Robin is single
Suppose that Jimmy and Roslyn are married and have the following adjusted gross incomes. Compute their tax liabilities individually and as a couple. Determine whether they receive a marriage bonus or
Bob and Elizabeth have the following wage and salary incomes. Bob is self-employed while Elizabeth has an employer. Compute their payroll taxes using the tax schedule in Table 14.8.
Consider the effect of deductibility on combined federal and state tax rates. a. Fill in the blanks of a table patterned after Table 14.3 of the text, but using the federal marginal tax rates of 15%
Loretta is a single mom with two children who works at the Montgomery County Clerk’s Office and earns $20,000 per year in salary. a. Compute the EITC that Loretta is qualified to receive. Use the
Fred and Ethel are married with two children and plan to file jointly. a. Their taxable income sources were as follows. Wages and Salaries ………………………………………$42,381Interest
Draw a graph of a firm in a monopolistically competitive industry illustrating demand, marginal revenue, marginal cost, average variable cost, and average total cost. Identify the firm’s profit in
How does a corporate income tax affect firms that operate in a perfectly competitive industry? Are the conclusions reached in the previous question applicable in this situation?
Consider a tax imposed on labor in a labor-intensive industry and not on other sectors of the economy. An example is Britain’s Selective Employment Tax that was applied to labor-intensive service
Senator Maize from Iowa has recently submitted a bill in the state legislature that would reduce the rate of taxation applied to capital in the agricultural sector of the economy. He believes that
Suppose that OZ Inc. is a large multi-national firm based in Kansas (producing brains, hearts, and courage) with annual worldwide net income of $60 million. OZ has 75 percent of its payroll and 90
Suppose that you had information that consumption expenditures for a particular good were a function of income, given by the relationship C = 1,200 + 0.3Y where C is consumption expenditure and Y is
State A has a sales tax of 4% that it applies to all goods and services. Consider the following households composed of four persons each located in State A. The Richardson family has an annual income
For each of the following properties, explain which method of valuation is most likely to be used and why (based on data availability): a. A McDonalds franchise store in suburban Washington, D.C. b.
Suppose that a property is assessed at AV = $120,000 for tax purposes while its market value is MV = $150,000. The nominal property tax rate is tn = 0.02. a. Compute the effective tax rate te. b.
Suppose that property can be considered a perpetuity, generating a perpetual income stream Ri each year forever. Assume that the constant discount rate is r. In the case of a perpetuity, the value
Most states permit assessments for agricultural land to be based on the value of the land in its agricultural use, ignoring potential developed uses for the land.a. Using a graph like that in Figure
In 1992 the State of Nebraska changed property tax law in a way that lowered the rate of taxation on capital in the non-residential sector of the economy while the rate of applied on residential
Suppose that a city-wide property reassessment has just been conducted. The last comprehensive reassessment occurred thirty years ago. The effect of the recent reassessment was to raise the city-wide
The Clemente family lives in Wasatch County, while the Law family lives on adjacent land in San Pedro County. The parcels of land the families occupy are both in the Murtaugh School District and
Explain how each of the following events would affect the federal government budget deficit, as it is measured by the government. Be sure to distinguish between one-time effects and permanent
Using a two- sector model as illustrated in Figure 18.3, demonstrate the effects of an increase in the income tax rate. Explain what implications you would expect in the private and public sector
Using a two-sector model as illustrated in Figure 18.3, demonstrate the effects of a federal government policy change that limits the quantity of municipal bonds that can be issued by state and local
The Caldwell family is in the 28% federal income tax bracket. They are discussing the relative merits of using some of the household savings to buy a bond for a city water plant project that will pay
Suppose that r is the rate of growth of desired expenditure in Figure 18.5 while p is the growth rate along the actual revenue path.a. Explain the relationship between r and p at points a, b, c and d
Local governments in the United States are sometimes criticized for being “Balkanized,” or being a crazy quilt pattern of overlapping jurisdictions of different sizes and purposes. In light of
Examine the graphs of demand for schooling presented in Figure 19.1. a. Explain how per-capita income is taken into account in the analysis. b. What is the effect on welfare losses due to an enforced
Assume that Cherry County has an initial budget line and indifference curves for the public good miles of highway and a composite good representing all other private goods. a. Indicate graphically
Consider the World Bank measures of decentralization in Figure 19.2.a. Using the blue decentralization measure, find the top three countries with centralized government.b. Using the gray
Consider the case of two school districts in a state that uses a power equalization school aid formula as described in equation (19.10). The state has set V* = 200,000. Alpha district has property
Specify whether each of the following taxes or fees is ability-based or benefits-based: a. Automobile fee based on value of the vehicle. b. Automobile fee based on weight of the vehicle. c.
The American Recovery and Reinvestment Act of 2009 (ARRA) provided substantial funding for local public schools to retain teachers in the wake of the 2008-09 recession.a. Analyze the impact of ARRA
Many states permit agricultural producers to form a voluntary market association to promote their commodities. For example, a Corn Producers Association may be formed to promote consumption of
Mancur Olson states in his book The Logic of Collective Action that “...the larger the group, the farther it will fall short of providing an optimal amount of a collective good.” Explain why this
The definition of a club says that members derive benefits from either sharing costs, association with one another, or from consuming a congestible public good. For each of the following groups
Suppose that in Figure 20.1 the cost of the swim club is F = $350,000 and the marginal cost is MC = 100n2.where n is club membership. a. Compute the optimal membership size for the club. b. Suppose
The following data depict the fiscal characteristics of two school districts in a metropolitan area, each composed of identical single-family houses with one pupil per household.The voters who have
Explain the economic issues involved in NATO expansion as countries such as Hungary and the Czech Republic approach membership in the defense organization. Specifically, how will admission of new
Consider club membership in the European Union. How would the decision to join the EU be different if membership required that the country also join the EMU? Explain in the context of club theory.
The president usually announces major policy initiatives in the State of the Union Address in January. Those initiatives are often not formulated with all the details worked out. In fact, the
Given what you know of taxes in the United States, explain whether U.S. tax policy is consistent with the IMF policy advice given in Table 21.2. If not, explain why not.
Given what you have learned about the elements of good tax policy in this text, evaluate the IMF policy advice given in Table 21.2. Identify areas of consistency between the text and the IMF advice.
Suppose ¥1 = $0.0077 in London, $1 = SF2.00 in New York, and SF1= ¥65 in Paris.a. If you begin by holding 10,000 yen, how could you make a profit from these exchange rates?b. Find the arbitrage
Suppose Sumitomo Bank quotes the ¥/$ exchange rate as 110.30-.40 and Nomura Bank quotes 110.40-.50. Is there an arbitrage opportunity? If so, explain how you would profit from these quotes. If not,
What is the cross-rate implied by the following quotes? a. C$/$ = 1.5613, $/€ =1.0008 b. ¥/$ = 124.84, $/£=1.5720 c. SF/$ = 1.4706, C$/$ = 1.5613
Suppose that the spot rates of the U.S. dollar, British pound, and Swedish kronor are quoted in three locations as the following:Is there an arbitrage opportunity? If so, explain how you, as a trader
Consider market for Japanese yen using the trade flow model. What would happen to the value of the Japanese yen (against the dollar), if Japanese people like American automobiles more than before.
What type of exchange rate system was the gold standard? Explain how it operated?
In what way is the European system of central banks similar to the Federal Reserve system
How does the gold standard eliminate the possibility of continuous balance of payments disequilibria?
How did the Bretton Woods system differ from the gold standard? What was the primary purpose of the IMF under the Bretton Woods? Why did the Bretton Woods system finally collapse?
What is seigniorage? Does the United States possess an unfair advantage in world commerce due to seigniorage?
What is the difference between "dollarization" and a currency board?
What is the difference between managed floating and free floating exchange rates?
Discuss the common economic reasons for why a country should adopt a fixed exchange rate arrangement.
Explain and graphically illustrate how speculators can attack a currency under the fixed exchange rate system.
How can a target zone help create a more stable exchange rate? Explain.
Explain the principles of double-entry bookkeeping in the Balance of Payments. In terms of international transactions, what do we count as a debit and a credit?
Classify the following transactions and enter them into the U.S. balance of payments:a. An American tourist travels to Frankfurt and spends $1,000 on hotel, bratwurst, and beer. He pays with a check
What is the current account balance in the question 2?
If a country has a current account deficit, will it be a net lender or borrower to the rest of the world? Should the country be concerned about its current account deficit? Discuss.
What is the balance of payments disequilibrium? Can a country run a balance of payments deficit indefinitely? Explain how balance of payments disequilibria can be automatic self-correcting.
Use Figure 4.1 to determine whether each of the currencies listed here is selling at a 3-month forward premium or discount against the dollar:a. Poundb. Swiss franc c. Yend. Canadian dollar
Calculate the per annum premium (discount) of a three-month forward contract on Canadian dollars based on the information in Figure 4.1.
List at least three ways in which a futures contract differs from a forward contract.
Assume U.S. corporation XYZ needs to arrange to have £10,000 in 90 days. Discuss the alternatives available to the corporation in meeting this obligation. What factors are important in determining
Suppose you are the treasurer of a large U.S. multinational firm that wants to hedge the foreign exchange risk associated with a payable of 1,000,000 Australian dollars due in 90 days. How many
Suppose you are the treasurer of a U.S. multinational firm that wants to hedge the foreign exchange risk associated with your firm's sale of equipment to a Swiss firm worth CHF1,000,000. The
Why must Eurobanks operate with narrower spreads than domestic banks? What would happen if the spreads were equal in both markets?
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