Chapter 18 Taxes Test Bank Docx - Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack by The book title does not provide the names of the authors.. DOCX document preview.
Chapter: Chapter 18: Taxes
Multiple Choice
1. Which of the following concerning operating taxes are true?
I. With full information, operating taxes can be computed without error.
II. The effects of research and development (R&D) should be removed from operating taxes.
III. Operating taxes are computed as if the company were financed entirely with equity.
IV. Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.
a) I and II only.
b) I and III only.
c) II and III only.
d) III and IV only.
Response: []
2. Which of the following are deferred tax assets (DTAs)?
I. Warranty reserves.
II. Tax loss carryforwards.
III. Nondeductible intangibles.
IV. Pension and postretirement benefits.
a) I and II only.
b) I and III only.
c) II and III only.
d) III and IV only.
Response: []
3. Which of the following concerning deferred taxes classified as nonoperating are true?
I. They will not be included in a discounted free cash flow (FCF) valuation.
II. They can be valued as part of their corresponding accounts (as in the case of pensions).
III. They can be valued separately (as in the case of net operating loss carryforwards).
IV. They can be ignored as accounting conventions (as in the case of nondeductible amortization).
a) I and II only.
b) II and III only.
c) II and IV only.
d) I, II, III, and IV.
Response: []
4. Multinational Co. (MNC) generated $1,000 million in domestic earnings before interest, taxes, and amortization (EBITA). MNC amortizes intangible assets at $200 million per year and takes a $300 million interest expense. MNC’s statutory (domestic) tax rate is 34 percent on earnings before taxes, but only 24 percent on foreign operations. MNC had $100 million of pretax foreign income and generates $20 million in ongoing research and development (R&D) tax credits. What is its effective tax rate on pretax profits?
a) 26.7 percent.
b) 29.0 percent.
c) 31.5 percent.
d) 33.3 percent.
Response: [Tax on domestic operations = {0.34 * (1,000 – 200 – 300)} – 20 = 150; tax on foreign operations = 0.24 * 100 = 24; total taxes = 174; effective tax rate = 174/(500 + 100) = 29.0%]
5. With respect to deferred taxes, which of the following is an operating entry?
a) Tax loss carryforwards.
b) Accelerated depreciation.
c) Nondeductible intangibles.
d) Pension and postretirement benefits.
Response: []
True/False
6. All deferred tax liabilities (DTLs) are classified as debt.
Response: [Deferred tax liabilities can be classified as either debt (if they are nonoperating) or equity (if they are operating) equivalents.]
7. The most comprehensive method for computing operating taxes from public data is to begin with reported taxes and undo financing and nonoperating items one by one.
Response: []
Multiple Choice
8. In estimating a firm’s cost of capital and value, which of the following is most accurate concerning marginal tax rates on nonoperating items?
a) Both GAAP and the IFRS require that marginal tax rates on nonoperating items be reported, so it not a problem.
b) Marginal tax rates on nonoperating items are usually not reported, but in most cases an analyst can ignore them because they are so small.
c) Marginal tax rates on nonoperating items are usually not reported, and an analyst will have to make an assumption about the tax jurisdiction in which nonoperating items are held.
d) IFRS requires that marginal tax rates on nonoperating items be reported, and an analyst estimating the value of a company that uses GAAP can use approximations from similar firms using IFRS for such marginal tax rates.
Response: []
True/False
9. As a general rule, deferred tax assets and deferred tax liabilities are considered part of invested capital.
Response: [As a general rule, DTAs and DTLs are not considered part of invested capital.]
10. The effects of research and development should be removed from operating taxes.
Response: [Research and development expenditures (and tax credits) are a normal part of operations.]
11. Operating taxes are computed as if the company were financed entirely with equity.
Response: []
12. It is not correct to use the company’s effective tax rate with no adjustments when estimating operating taxes.
Response: [Using the effective tax rate will not make the proper adjustments for tax credits and differential tax rates across countries.]
13. The income tax footnote is a good source of information for deferred tax liabilities.
Response: []
14. Usually, a company will record a DTL during the year of an acquisition and then draw down the DTL as the intangible amortizes.
Response: []
15. Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.
Response: [Tax rates across jurisdictions can vary widely, so it is important to apply the appropriate rates to income earned in different jurisdictions.]
Multiple Choice
16. Which of the following are operating deferred tax assets or deferred tax liabilities?
I. Nondeductible intangibles.
II. Tax loss carryforwards.
III. Accelerated depreciation.
IV. Pension and postretirement benefits.
V. Warranty reserves.
a) I, II, and IV.
b) III and V.
c) I, III, and V.
d) II, IV, and V.
Response: []
Short Answer
17. Identify warranty reserves as operating or nonoperating and as an asset or a liability. Explain how the required treatment of warranty reserves determines the relationship between cash and accrual-based taxes.
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Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack
By The book title does not provide the names of the authors.