1. A firm\'s taxable income is $12M; calculate tax expense. (A tax table follows
ID: 2419250 • Letter: 1
Question
1. A firm's taxable income is $12M; calculate tax expense. (A tax table follows.) (a) $4,100,000 (b) $4,088,250 (c) $5,100,000 (d) $5,088,250 Taxable Income Rate Taxable Income Rate $0-$50K 15% >$335K-10M 34% >$50K-$75K 25% >$10M-151/3M 35% >$75K-$100K 34% >151/3M-$18M 38% >$100K-$335K 39% >$18M 35%
2. Various stakeholders in a firm care more about: (a) the book value of the firm’s assets, (b) the mar-ket value of the firm’s assets, or (c) how new the assets are.
3. Assume you deposit $25,000 in a corporate bond fund that pays 3%. What will value or how much money will you have in this mutual fund in 3 years?
(a) $26,250.24 (b) $26,010.13 (c) $27,318.18 (d) 28,137.72 4. Which of the following statements is most true? (NI = net income; CF = cash flow)
a) NI and CF are totally unconnected, and investors care more about NI.
b) NI and CF are certainly positively related, but investors care more about NI.
c) NI and CF are totally unconnected, and investors care more about CF. d) NI and CF are certainly positively related, but investors care more about CF.
5. Holding all else constant, the future value of an investment will increase if:
(a) the investment’s expected future cash flows involve more, as opposed to less, uncertainty.
(b) the investment is compounded for a larger, as opposed to a smaller, number of periods.
(c) the investment is compounded at a higher, as opposed to a lower, interest rate. (d) both b and c.
Explanation / Answer
5. If everything else remains constant, investment with higher interest rate will get more future value. Investment which compounds in small periods will also give higher returns against higher periods. For example, If $10,000 at an interest rate of 3% annual compounded for 2 years will give a return of $10,609. If the interest rate is 5%, then the return will be $11,025. Same way, if $10,000 at 3% compounded daily for 2 years will give a return of $10,618.34. However, if it is compounded annually, then the return will be $10,609 Hence the answer is d. both b and c
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