FE-LIKE PROBLEM 9.1
ANSWER: d. 34.0%
rationale: SEE TABLE 9.1
FE-LIKE PROBLEM 9.2
ANSWER: b. 20.5%
rationale: ($13,750 + 0.34($87,000 – $75,000)) / $87,000 = 0.2049 = 20.5%
FE-LIKE PROBLEM 9.3
ANSWER: c. $4,450,000
rationale: $3,400,000 + 0.35($13,000,000 – $10,000,000) = $4,450,000
FE-LIKE PROBLEM 9.4
ANSWER: b. DEPRECIATION AND INTEREST ARE SUBTRACTED, PRINCIPAL IS NOT
rationale: SEE SECTION 9-1
FE-LIKE PROBLEM 9.5
ANSWER: c. MARR / (1 – TAX RATE)
rationale: SEE SECTION 9-2
FE-LIKE PROBLEM 9.6
ANSWER: b. $8,777
rationale: ATCF = $22,500 – $7,434 – $892 – $5,397 = $8,777
FE-LIKE PROBLEM 9.7
ANSWER: c. $3,435
rationale: TI = $22,500 – $2,400 – $16,665 = $3,435
FE-LIKE PROBLEM 9.8
ANSWER: b. $3,062
rationale: $8,018 = $20,000 – $8,920 – INTEREST PAYMENT;
INTEREST PAYMENT = $3,062
FE-LIKE PROBLEM 9.9
ANSWER: c. $6,633
rationale: TI = $23,000 – $3,877 – $12,490 = $6,633
FE-LIKE PROBLEM 9.10
ANSWER: b. $13,665
rationale: ATCF = $23,000 – $3,203 – $3,877 – $2,255 = $13,665
PROBLEM 9.1
AD VALOREM TAX (PROPERTY)
SALES TAX
EXCISE TAX (A TAX ON THE MANUFACTURE, SALE, OR CONSUMPTION OF A COMMODITY)
INCOME TAX
INCOME TAXES TEND TO HAVE THE MOST SIGNIFICANT EFFECT
PROBLEM 9.2
a GROSS INCOME – A COMPANY’S INCOME BEFORE TAKING DEDUCTIONS OR TAXES INTO ACCOUNT.
b EXPENSES – DECREASES IN ECONOMIC BENEFITS DURING THE ACCOUNTING PERIOD
c DEPRECIATION – METHOD OF ATTRIBUTING COST OF ASSET ACROSS ITS USEFUL LIFE
d INTEREST – THE “RENT” PAID TO BORROW MONEY
e PROPERTY DISPOSITION – THE OFFERING OR SELLING OF PROPERTY FOR TENDER
PROBLEM 9.3
a LOAN INTEREST PAID
INCOME TAX
b F
c T
d F
PROBLEM 9.4
a
b
c
THE TAX REFORM ACT OF 1986 WAS INTENDED TO SIMPLIFY THE INCOME TAX CODE, BROADEN THE TAX BASE, AND
ELIMINATE MANY TAX SHELTERS THAT EXISTED AT THE TIME. ALTHOUGH IT WAS INTENDED TO BE TAX-REVENUE
NEUTRAL, SOME ESTIMATES ARE THAT OVERALL REVENUE TO THE FEDERAL GOVERNMENT WAS REDUCED BY $8.9
BILLION DUE TO THE ACT.
THE PRIMARY EFFECTS OF THE ECONOMIC RECOVERY TAX ACT OF 1981 WERE SIGNIFICANTLY REDUCING
INDIVIDUAL INCOME TAX RATES, EXPENSING DEDUCTABLE PROPERTY, PROVIDING INCENTIVES FOR SMALL
BUSINESSES, AND PROVIDING INCENTIVES FOR INDIVIDUALS TO INVEST. THE ACT ALSO PROVIDED FOR AUTOMATIC
ADJUSTMENTS OF TAX BRACKETS AND INDEXING FOR INFLATION.
THE 1993 OMNIBUS BUDGET RECONCILIATION ACT OF 1993 IS ALSO KNOWN AS THE DEFICIT REDUCTION ACT OF
1993. IT WAS PRESIDENT CLINTON’S FIRST BUDGET. MANY CREDIT THE BILL WITH SETTING THE STAGE FOR THE
BUDGET SURPPLUSES THAT OCCURRED IN THE LATE 1990s. THE BUDGET PROPOSAL CALLED FOR: INCREASING
CORPORATE INCOME TAXES FROM 34 PERCENT TO 36 PERCENT FOR CORPORATIONS WITH TAXABLE INCOMES
EXCEEDING $10 MILLION; ENDING SOME CORPORATE SUBSIDIES, TAXING SOCIAL SECURITY BENEFITS FOR HIGH
INCOME EARNERS; AND PROVIDING EARNED INCOME CREDITS FOR INCOME LESS THAN $30,000.
PROBLEM 9.5
IT IS RECOMMENDED THAT A COMPARISON OF INVESTMENT ALTERNATIVES BE PERFORMED ON AN AFTER-TAX
BASIS, RATHER THAN A BEFORE-TAX BASIS, BECAUSE THE EFFECT OF INCOME TAXES CAN CHANGE THE
RECOMMENDATION OF WHICH INVESTMENT TO CHOOSE. THE DEDUCTABILITY OF DEPRECIATION AND INTEREST
PAID WHEN BORROWED FUNDS ARE USED TO ACQUIRE CAPITAL EQUIPMENT CONTRIBUTE TO THE POSSIBILITY AN
INVESTMENT MIGHT BE JUSTIFIED ECONOMICALLY WHEN INCOME TAXES ARE CONSIDERED, BUT NOT JUSTIFIED
WHEN INCOME TAXES ARE NOT CONSIDERED. OF COURSE, IN ANY SUCH COMPARISONS, A DIFFERENT MINIMUM
ATTRACTIVE RATE OF RETURN IS WHEN INCOME TAXES ARE NOT CONSIDERED THAN IS USED WHEN INCOME TAXES
ARE CONSIDERED. THE AFTER-TAX RATE IS TYPICALLY SET EQUAL TO THE PRODUCT OF THE BEFORE-TAX RATE
AND ONE MINUS THE INCOME TAX RATE.
PROBLEM 9.6
THE FOLLOWING ANSWERS ARE BASED ON TABLE 9.1
a$3,750 =25000*0.15
b$12,500 =7500+0.25*(70000-50000)
c$20,550 =13750+0.34*(95000-75000)
d$61,250 =22250+0.39*(200000-100000)
e$340,000 =113900+0.34*(1000000-335000)
f$4,100,000 =3400000+0.35*(12000000-10000000)
g$5,910,000 =5150000+0.38*(17000000-15000000)
h$8,750,000 =0.35*25000000
PROBLEM 9.7
aTI TAX
$15,000.00 $2,250.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
EFFECTIVE 15.00%
bTI TAX
$50,000.00 $7,500.00
$0.00
$0.00
$0.00
$0.00
EFFECTIVE 20.65%
cTI TAX
$50,000.00 $7,500.00
$0.00
$0.00
$0.00
$180,000.00 $53,450.00 TOTALS
MARGINAL 39.00%
dTI TAX
$50,000.00 $7,500.00
$25,000.00 $6,250.00
$65,000.00 $22,100.00
$0.00
$0.00
$0.00
$400,000.00 $136,000.00 TOTALS
EFFECTIVE 34.00%
MARGINAL 34.00%
eTI TAX
$50,000.00 $7,500.00
$25,000.00 $6,250.00
$25,000.00 $8,500.00
$235,000.00 $91,650.00
$9,665,000.00 $3,286,100.00
$5,000,000.00 $1,750,000.00
$1,700,000.00 $646,000.00
$0.00
$16,700,000.00 $5,796,000.00 TOTALS
EFFECTIVE 34.71%
MARGINAL 38.00%
PROBLEM 9.8
aTI TAX
$12,000.00 $1,800.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$12,000.00 $1,800.00 TOTALS
MARGINAL 15.00%
bTI TAX
$50,000.00 $7,500.00
$15,000.00 $3,750.00
$0.00
$0.00
$0.00
$0.00
EFFECTIVE 17.31%
cTI TAX
$50,000.00 $7,500.00
$0.00
$0.00
$0.00
$220,000.00 $69,050.00 TOTALS
MARGINAL 39.00%
dTI TAX
$50,000.00 $7,500.00
$665,000.00 $226,100.00
$0.00
$0.00
$1,000,000.00 $340,000.00 TOTALS
EFFECTIVE 34.00%
MARGINAL 34.00%
eTI TAX
$50,000.00 $7,500.00
$25,000.00 $6,250.00
$25,000.00 $8,500.00
$235,000.00 $91,650.00
$9,665,000.00 $3,286,100.00
$5,000,000.00 $1,750,000.00
$3,333,333.00 $1,266,666.54
$966,667.00 $338,333.45
$19,300,000.00 $6,754,999.99 TOTALS
EFFECTIVE 35.00%
MARGINAL 35.00%