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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 5.4 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A) 22.00 percent
B) 5) 40 percent
C) 7) 40 percent
D) 4) 30 percent
E) 6) 92 percent

F) A) and C)
G) None of the above

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Question 52

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Rodney, a cash-basis taxpayer, owes $40,000 in tax-deductible consulting fees for his business. Assume that it is December 28^th and that Rodney can avoid any finance charges if he pays the accounting fees by January 10^th. Rodney's tax rate this year is 32 percent and his after-tax rate of return is 10 percent. What tax rate next year will make Rodney indifferent between paying the $40,000 this year or next year? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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If Rodney pays the $40,000 in December, ...

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Question 53

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Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential) pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

In general, tax planners prefer to defer income. This is an example of the conversion strategy.

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $26,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent. (1)Corporate bond issued at face value with 16 percent stated interest rate payable annually. (2)Dividend-paying stock with an annual qualifying dividend equal to 9 percent of her investment. (3)Growth stock with an annual growth rate of 8.4 percent and no dividends paid. (Round your intermediate calculations to the nearest whole number.)

Which of the following is an example of the income-shifting strategy?

Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 10.4 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate? (Do not round intermediate computations.)

An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions. Explain why this is true. Be specific.

When considering cash inflows, higher present values are preferred.

If Joel earns a 6 percent after-tax rate of return, $26,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Which is not a basic tax planning strategy?

Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.

Assume that John's marginal tax rate is 17 percent. If a city of Austin bond pays 9 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

Assume that Bill's marginal tax rate is 32 percent. If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December, he performed $46,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

If Jim invested $100,000 in an annual dividend-paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?