* Corporation X needs $ 1,000,000 and can increase this through debt at an annual rate of 6 percent, or sale of preferred stock at an annual cost of 8 percent. If the corporation has a tax rate of 21 percent, the after-tax cost of each is ________.

debt: $ 60,000; preferred stock: $ 80,000

debt: $ 47,400; preferred stock: $ 63,200

debt: $ 47,400; preferred stock: $ 80,000

debt: $ 60,000; preferred stock: $ 63,200

QUESTION 2

* The average tax rate for a corporation with ordinary income of $ 105,000 and a tax liability of $ 24,200 is ________.

46 percent

23 percent

34 percent

15 percent

QUESTION 3

* Suppose a given business pays a 10% tax on its first $ 10,000 of income, 12% tax on income above $ 10,000 but below $ 40,000, and 22% tax on income above $ 40,000. Suppose the business earns $ 50,000 in revenue this year. Your tax liability is ________.

$ 6,800

$ 11,000

$ 9,800

$ 5,800

QUESTION 4

* Johnson, Inc. just ended the year by making a sale of $ 10,000 of merchandise purchased during the year at a total cost of $ 7,000. Although the firm paid for the merchandise in full during the year, it has yet to receive payment from the customer. The net profit and cash flow from this sale for the year are ________.

$ 3,000 and $ 10,000, respectively

$ 3,000 and - $ 7,000, respectively

$ 7,000 and - $ 3,000, respectively

$ 3,000 and $ 7,000, respectively

QUESTION 5

* Suppose that a certain business pays a 10% tax on its first $ 10,000 in revenue, 12% tax on income above $ 10,000 but below $ 40,000, and 22% tax on income above $ 40,000. Suppose the business earns $ 50,000 in revenue this year. Your average tax rate is close to ________.

22%

14%

10%

17%

QUESTION 6

* Consider two firms, The Debt Corporation and the No Debt Corporation. Both companies are expected to have earnings before interest and taxes of $ 200,000 over the next year. Additionally, Debt is expected to incur $ 80,000 in interest expense as a result of its borrowing, while No Debt will incur no interest expense because it does not use debt financing. Both firms are in the 21 percent tax bracket. After-tax interest expense for company Debt is ________.

$ 63,200

$ 16,800

$ 25,200

$ 80,000

QUESTION 7

* Consider two firms, The Debt Corporation and the No Debt Corporation. Both companies are expected to have earnings before interest and taxes of $ 200,000 over the next year. Additionally, Debt is expected to incur $ 80,000 in interest expense as a result of its borrowing, while No Debt will incur no interest expense because it does not use debt financing. Both firms are in the 21 percent tax bracket. The tax liability of these companies is___________.

$ 80,000 Debt and $ 42,000 No Debt

$ 25,200 Debt and $ 42,000 No Debt

$ 120,000 Debt and $ 158,000 No Debt

$ 94,899 Debt and $ 124,800 No Debt

QUESTION 8

* Before the Tax Cuts and Jobs Act, corporations faced progressive tax tables that ranged from 15% to 39%. Under that old tax law, a company with revenues of $ 100 million would have owed taxes of $ 35 million. Under the Tax Cuts and Jobs Act, the tax rate for corporations is 21%. For a business that earns $ 100 million in taxable income, the tax reduction the firm enjoys due to the new tax law is close to ________.

$ 18 million

$ 21 million

$ 14 million

$ 35 million

QUESTION 9

* You own a building supply store. Today you sold building materials to a contractor for $ 10,000 that you purchased a week ago for $ 8,000. You paid for the materials in cash, but you sold them to the contractor on credit, and you expect her to pay her bill in a few months. Based on this information, we can say that during the week it made a positive profit, but experienced a negative cash flow.

True

False

QUESTION 10

* Consider two firms, The Debt Corporation and the No Debt Corporation. Both companies are expected to have earnings before interest and taxes of $ 200,000 over the next year. Additionally, Debt is expected to incur $ 80,000 in interest expense as a result of its borrowing, while No Debt will incur no interest expense because it does not use debt financing. Both firms are in the 21 percent tax bracket. The earnings after im