Full fle at http://testbank360.eu/test-bank-pr http://testbank360.eu/test-bank-principles-o inciples-o-managerial-fnance-14 -managerial-fnance-14ththedition-gitman Principles of Managerial Finance, 14e (Gitman/Zutter) Chapter 2 The Financial Market Environment
2.1 Understand the role that financial institutions institutions play in managerial finance. 1) A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments. Answer: TU! "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: tatus: -revious !dition AA/ Tag: Tag: Analytic 0ills 2) ommercial ban0s advise firms on ma'or transactions such as mergers or financial restructurings. Answer: #A%! "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: tatus: -revious !dition AA/ Tag: Tag: Analytic 0ills ) As a 0ey participant in financial transactions, individuals are . A) net demanders of funds because they save more money than they borrow /) net users of funds because they save less money than they borrow ) net suppliers of funds because they save more money than they borrow ") net purchasers of funds because they save more money than they borrow Answer: "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Tag: Analytic 0ills
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6) (overnment is typically a . A) net provider of funds because it borrows b orrows more than it saves /) net demander of funds because it borrows more than it saves ) net provider of funds because it can print money at will ") net demander of funds because it saves more than it borrows Answer: / "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Tag: Analytic 0ills 5) (overnment can obtain funds . A) by trading in e7uity mar0et /) by issuing financial instruments such as futures and options ) through fore8 mar0et ") by selling debt securities Answer: " "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Tag: Analytic 0ills 9) #irms that re7uire funds from e8ternal sources can obtain them . A) through financial institutions /) from central ban0 directly ) through fore8 mar0et ") by issuing Tbills Answer: A "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Tag: Analytic 0ills
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6) (overnment is typically a . A) net provider of funds because it borrows b orrows more than it saves /) net demander of funds because it borrows more than it saves ) net provider of funds because it can print money at will ") net demander of funds because it saves more than it borrows Answer: / "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Tag: Analytic 0ills 5) (overnment can obtain funds . A) by trading in e7uity mar0et /) by issuing financial instruments such as futures and options ) through fore8 mar0et ") by selling debt securities Answer: " "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Tag: Analytic 0ills 9) #irms that re7uire funds from e8ternal sources can obtain them . A) through financial institutions /) from central ban0 directly ) through fore8 mar0et ") by issuing Tbills Answer: A "iff: 1 Topic: To pic: #inancial $nstitutions %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Tag: Analytic 0ills
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) $nvestment ban0s are institutions that . A) perform all activities of commercial ban0s and retail ban0s /) are e8empted from ecurities and !8change ommission regulations ) engage in trading and mar0et ma0ing activities ") are only limited to capital mar0et activities Answer: "iff: 1 Topic: To pic: ommercial /an0s, $nvestment /an0s, And The hadow /an0ing ystem %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Tag: Analytic 0ills ;) ) The shadow ban0ing system describes a group of institutions that engage in lending activities, much li0e traditional ban0s. Answer: TU! "iff: 1 Topic: To pic: ommercial /an0s, $nvestment /an0s, And The hadow /an0ing ystem %earning &b'.: %( 1 %earning &utcome: #*1 +uestion tatus: tatus: -revious !dition AA/ Tag: Tag: Analytic 0ills
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1*)
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2) #inancial mar0ets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills ) A public offering is the sale of a new security issue@typically debt or preferred stoc0@ directly to an investor or group of investors. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 6) A primary mar0et is a financial mar0et in which preowned securities are traded. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 5) The (lassteagall Act was imposed to allow commercial and investment ban0s to combine and wor0 together. Answer: #A%! "iff: 1 Topic: #inancial $nstitutions and ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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9) ?ost businesses raise money by selling their securities in a . A) public offering /) fore8 mar0et ) futures mar0et ") commodities mar0et Answer: A "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills )
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>) The sale of a new security directly to an investor or a group of investors is called . A) arbitraging /) short selling ) a capital mar0et transaction ") a private placement Answer: " "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 1*) The mar0et is where securities are initially issued and the mar0et is where preowned securities Bnot new issues) are traded. A) primaryC secondary /) moneyC capital ) secondaryC primary ") primaryC money Answer: A "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( 2 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 2. "escribe the differences between the capital mar0ets and the money mar0ets. 1) The overthecounter B&T) mar0et is a mar0et for trading smaller and unlisted securities. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 2) 3A"A+ is considered an &T mar0et since it is not recognied by the ! as a Dlisted e8change.D Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills opyright 4 2*15 -earson !ducation, $nc.
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) $n the &T mar0et, the as0 price is the highest price offered by a dealer to purchase a given security. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 6) $n the !urobond mar0et, corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United tates. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 5) apital mar0ets are for investors who want a safe temporary place to deposit funds where they can earn interest and for borrowers who have a shortterm need for funds. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 9) ?oney mar0ets are mar0ets for longterm funds such as bonds and e7uity. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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) An efficient mar0et is a mar0et that establishes correct prices for the securities that firms sell and allocates funds to their most productive use as a result of the intense competition among investors. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills ;) ?oney mar0ets involve the trading of securities with maturities of one year or less. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills >) !urocurrency deposits arise when a corporation or individual ma0es a deposit in a ban0 in a currency other than the local currency of the country where the ban0 is located. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 1*) The !urocurrency mar0et is a mar0et for shortterm ban0 deposits denominated in U.. dollars or other easily convertible currencies. Answer: TU! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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11) The money mar0et is a financial relationship created by a n umber of institutions and arrangements that allows suppliers and demanders of longterm funds to ma0e transactions. Answer: #A%! "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 12) The overthecounter B&T) mar0et is . A) a highly li7uid mar0et as compared to 3A"A+ /) a mar0et in which low ris0high return securities are traded ) an organied mar0et in which all financial derivatives are traded ") a mar0et where smaller, unlisted securities are traded Answer: " "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 1)
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16)
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1) )
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2*) A mar0et that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called aBn) . A) future mar0et /) fore8 mar0et ) efficient mar0et ") wea0form mar0et Answer: "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 21) The is created by a financial relationship between suppliers and demanders of shortterm funds. A) stoc0 mar0et /) capital mar0et ) fore8 mar0et ") money mar0et Answer: " "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 22) /y definition, the money mar0et involves the buying and selling of . A) stoc0s and bonds /) shortterm securities ) all financial instruments e8cept derivatives ") secured premium notes Answer: / "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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2) ?ost money mar0et transactions are made in . A) common stoc0 /) mar0etable securities ) commodities mar0et ") preferred stoc0 Answer: / "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 26) The is created by a number of institutions and arrangements that allow the suppliers and demanders of longterm funds to ma0e transactions. A) fore8 mar0et /) capital mar0et ) money mar0et ") commodities mar0et Answer: / "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 25) %ongterm debt instruments used by both government and business are 0nown as . A) preferred stoc0s /) Tbills ) bonds ") e7uities Answer: "iff: 1 Topic: #inancial ?ar0ets %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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29)
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2>) An efficient mar0et is one where . A) prices of stoc0s move up and down widely without apparent reason /) prices of stoc0s remain low for long periods of time ) prices of stoc0s are unaffected by mar0et news ") the price of a security is an unbiased estimate of its true value Answer: " "iff: 1 Topic: The apital ?ar0et %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills *) The money mar0et is a mar0et . A) that enables suppliers and demanders of longterm funds to ma0e transactions /) which brings together suppliers and demanders of shortterm funds ) where smaller, unlisted securities are traded ") where all derivatives are traded Answer: / "iff: 2 Topic: The apital ?ar0et %earning &b'.: %( %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Analytic 0ills 1) Ape8 $nc. issues a bond of E1,*** which pays interest semiannually at a coupon interest rate of ;F. The maturity of the bond is 15 years.
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2.6 !8plain the root causes and subse7uent effects of the 2**; financial crisis and recession. 1) ecuritiation is the process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary mar0et. Answer: TU! "iff: 1 Topic: #inancial $nstitutions and eal !state #inance %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 2) ecuritiation made it harder for ban0s to lend money because they could not pass the ris0 on to other investors. Answer: #A%! "iff: 1 Topic: #inancial $nstitutions and eal !state #inance %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills ) ?ortgagebac0ed securities are securities that represent claims on the cash flows generated by a pool of mortgages. Answer: TU! "iff: 1 Topic: #inancial $nstitutions and eal !state #inance %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 6) -rior to the 2**; financial crisis, most investors viewed mortgagebac0ed securities as relatively safe investments. Answer: TU! "iff: 1 Topic: #alling Gome -rices And "elin7uent ?ortgages %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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5) ubprime mortgages are mortgage loans made to borrowers with high incomes and better than average credit histories. Answer: #A%! "iff: 1 Topic: #alling Gome -rices And "elin7uent ?ortgages %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 9) ecessions associated with a ban0ing crisis tend to be more severe than other recessions because many businesses rely on credit to operate. Answer: TU! "iff: 1 Topic: pillover !ffects And The (reat ecession %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Analytic 0ills ) The process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary mar0et is called . A) valuation /) securitiation ) private placement ") capital restructuring Answer: / "iff: 1 Topic: #inancial $nstitutions and eal !state #inance %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills ;) The primary ris0 of mortgagebac0ed securities is . A) that the prices of have high volatality /) that the prices of housing will increase ) that the government will not be able to meet the guarantees on the cash flows ") that homeowners may not be able to, or choose not to, repay their loans Answer: " "iff: 2 Topic: #inancial $nstitutions and eal !state #inance %earning &b'.: %( 6 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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2.5 Understand the ma'or regulations and regulatory bodies that affect financial institutions and mar0ets. 1) The (lassteagall Act . A) was intended to regulate the activities in the secondary mar0et /) created the ecurities !8change ommission ) separated the activities of commercial and investment ban0s ") was intended to regulate the activities in the primary mar0et Answer: "iff: 2 Topic: egulations (overning #inancial $nstitutions %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 2) The ecurities Act of 1> focuses on regulating the sale of securities in the primary mar0et, whereas the 1>6 Act deals with the regulations governing the transactions in the secon dary mar0et. Answer: TU! "iff: 1 Topic: egulations (overning #inancial ?ar0ets %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills ) The #ederal "eposit $nsurance orporation B#"$) . A) is an agency, created by the (lassteagall Act ,that monitors ban0s on a regular basis to ensure that they were safe and sound /) is an agency that monitors business combinations between commercial ban0s, investment ban0s, and insurance companies ) guarantees individuals will not lose any money held at any type of financial institution that fails ") guarantees individuals will not lose any money, up to a specified amount, h eld at any type of financial institution that fails Answer: A "iff: 1 Topic: egulations (overning #inancial $nstitutions %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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6) The (ramm%each/liley Act . A) is created to monitor ban0s on a regular basis to ensure that they were safe and sound /) allows business combinations between commercial ban0s and investment ban0s, but not insurance companies ) allows business combinations between commercial ban0s, investment ban0s, and insurance companies ") was signed during the (reat "epression because of the financial crisis Answer: "iff: 1 Topic: egulations (overning #inancial $nstitutions %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 5) /) The (ramm%each/liley Act ) The ecurities !8change Act of 1>6 ") The (lassteagall Act Answer: "iff: 1 Topic: egulations (overning #inancial ?ar0ets %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 9) /) The (ramm%each/liley Act ) The ecurities !8change Act of 1>6 ") The (lassteagall Act Answer: A "iff: 1 Topic: egulations (overning #inancial ?ar0ets %earning &b'.: %( 5 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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2.9 "iscuss business ta8es and their importance in financial decisions. 1) The ordinary income of a corporation is income earned through the sale of goods or services and is currently ta8ed sub'ect to the individual income ta8 rates. Answer: #A%! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 2) The marginal ta8 rate represents the rate at which the ne8t dollar of income is ta8ed. Answer: TU! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills ) All dividend income received by a corporation is e8empted from ta8ation. Answer: #A%! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills 6) The marginal ta8 rate paid on a firmHs ordinary income can be calculated by dividing its ta8es by its net income. Answer: #A%! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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5) The average ta8 rate paid on the firmHs ordinary income can be calculated by dividing its ta8es by its ta8able income. Answer: TU! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: 3ew AA/ Tag: Analytic 0ills 9) "ividends received by a corporation on an investment in the common and preferred stoc0 of another corporation, where ownership in the dividend paying corporation is less than 2*F, is sub'ect to * percent e8clusion for ta8 purposes. Answer: TU! "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills ) The ta8 deductibility of various e8penses such as general and administrative e8penses . A) increases their preta8 cost /) reduces their afterta8 cost ) has no effect on their afterta8 cost ") has an unpredictable effect on their afterta8 cost Answer: / "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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;) The ta8 liability of a corporation with ordinary income of E1*5,*** is . Range of taa!le income Marginal rate E
* to E 5*,*** 5*,*** to 5,*** 5,*** to 1**,*** 1**,*** to 5,*** 5,*** to 1*,***,*** 1*,***,*** to 15,***,*** A) E62,*** /) E5,** ) E2,>5* ") E26,65* Answer: " "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
15F 25 6 > 6 5
>) The ta8 liability of a corporation with ordinary income of E1,5**,*** is . Range of taa!le income Marginal rate E
* to E 5*,*** 5*,*** to 5,*** 5,*** to 1**,*** 1**,*** to 5,*** 5,*** to 1*,***,*** 1*,***,*** to 15,***,*** A) E6>;,25* /) E51*,*** ) E5;5,*** ") E9>*,*** Answer: / "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
15F 25 6 > 6 5
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1*) The ta8 liability of a corporation with ordinary income of E1,1**,*** is . Range of taa!le income Marginal rate E
* to E 5*,*** 5*,*** to 5,*** 5,*** to 1**,*** 1**,*** to 5,*** 5,*** to 1*,***,*** 1*,***,*** to 15,***,*** A) E92,25* /) E6*,*** ) E6,*** ") E>*,*** Answer: "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
15F 25 6 > 6 5
11) Iennings, $nc. has a ta8 liability of E1*,*** on preta8 income of E5**,***.
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12) The average ta8 rate of a corporation with ordinary income of E1*5,*** and a ta8 liability of E26,2** is . A) 69 percent /) 2 percent ) 6 percent ") 15 percent Answer: / "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 1) $f a corporation sells certain capital e7uipment for more than its initial purchase price, the difference between the sale price and the purchase price is called aBn) . A) ordinary gain /) revenue gain ) capital gain ") abnormal gain Answer: "iff: 1 Topic: apital (ains %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills 16) $n general, most corporate capital gains are ta8ed at ta8 rate. A) the average /) the regular corporate ) the historic ") a * percent Answer: / "iff: 1 Topic: apital (ains %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: Analytic 0ills
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15) ongress allows corporations to e8clude from ta8es * to 1** percent of dividends received from other corporations. ongress did this to . A) encourage corporations to invest in each other /) avoid double ta8ation on dividends ) eliminate most of the potential ta8 liability from the dividends received by the second and any subse7uent corporations ") lower the cost of e7uity financing for corporations Answer: "iff: 1 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: eflective Thin0ing 0ills 19) orporation J needs E1,***,*** and can raise this through debt at an annual rate of 1* percent, or preferred stoc0 at an annual cost of percent. $f the corporation has a 6* percent ta8 rate, the afterta8 cost of each is . A) debt: E1**,***C preferred stoc0: E*,*** /) debt: E9*,***C preferred stoc0: E62,*** ) debt: E9*,***C preferred stoc0: E*,*** ") debt: E1**,***C preferred stoc0: E62,*** Answer: "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: eflective Thin0ing 0ills 1) orporation A owns 15 percent of the stoc0 of corporation /. orporation / pays corporation A E1**,*** in dividends in 2**2. orporation A must pay ta8 on . A) E1**,*** of ordinary income /) E *,*** of ordinary income ) E *,*** of ordinary income ") E *,*** of capital gain Answer: / "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: eflective Thin0ing 0ills
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1;) The dividend e8clusion for corporations receiving dividends from another corporation has resulted in . A) a lower cost of e7uity for the corporation paying the dividend /) a higher relative cost of bondfinancing for the corporation paying the dividend ) stoc0 investments being relatively less attractive, relative to bond investments made b y one corporation in another corporation ") stoc0 investments being relatively more attractive relative to bond investments made by one corporation in another corporation Answer: " "iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: evised AA/ Tag: eflective Thin0ing 0ills 1>)
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2*) ?eese -aper "istributors, $nc. has beforeta8 earnings of E1,>* *,***. alculate the amount of the total ta8 liability. Range of taa!le income Marginal rate E
* 5*,*** 5,*** 1**,*** 5,*** 1*,***,*** 15,***,***
to to to to to to to
E
5*,*** 5,*** 1**,*** 5,*** 1*,***,*** 15,***,*** 1;,,
15F 25 6 > 6 5 ;
Answer: Mee"e #aper $i"tri!utor"
"iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: eflective Thin0ing 0ills
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21) "uring 2**2, a firm has sold 5 assets described below. alculate the ta8 liability on the assets. The firm pays a 6* percent ta8 rate on ordinary income.
Answer:
"iff: 2 Topic: &rdinary $ncome %earning &b'.: %( 9 %earning &utcome: #*1 +uestion tatus: -revious !dition AA/ Tag: Analytic 0ills
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