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Quiz 4 Answers

Quiz 4 Answers. November 8, 2013.

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Quiz 4 Answers

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  1. Quiz 4 Answers November 8, 2013

  2. At the beginning of the year, a pie company has $P in the bank. During the year it takes in $A for pie sales. It pays $B for pie ingredients, and $C for wages and rent. It pays taxes at t%. At the end of the year, the amount the company has in the bank is: • P + (A-B-C)t • (P+A)t – B - C • P + (A-B-C)(1-t) • P + A – Bt - Ct

  3. A A-B-C B+C (A-B-C)(1-t) After-Tax Analysis

  4. A pie company, otherwise identical to the pie company in the previous question, also has an oven, purchased 10 years ago, which according to Revenue Canada rules depreciated by $D during the year. At the end of the year, the amount the company has in the bank is: • P + (A-B-C-D)t • (P+A)t – B – C - D • P + (A-B-C-D)(1-t) + D • P + A – (B+C+D)t

  5. A B+C A-B-C D A-B-C-D (A-B-C-D)(1-t) (A-B-C-D)(1-t)+D

  6. Yet a third pie company starts off the year with $P. It sells $A in pies, and pays no wages or rent, but it does buys an oven for $F. If Revenue Canada allows ovens to depreciate at d% per year, at the end of the year, the amount the company has in the bank is: • P + A(1-t) - F • P + (A-F)(1-t) • P +A(1-t) –F(CTF) • P + (A-Fd/2)(1-t) – F + Fd/2

  7. A A-Fd/2 Fd/2 (A-Fd/2)(1-t) (A-Fd/2)(1-t)+Fd/2 - F F

  8. A fourth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. It sells $A in pies, and pays no wages or rent, but it does sell the oven for $G. At the end of the year, the amount the company has in the bank is: • P + A(1-t) + G • P + A + G(CSF) • P + A(1-t) + G(CTF) • P + (A+G)(1-t)

  9. CCA Recapture You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n) If we now sell it for $S, then: 1. If S < UCC(n), no tax is owed. 2. If P > S > UCC(n), you owe tax on S-UCC(n) 3. If S > P, you owe tax on P – UCC(n), and S-P is a capital gain.

  10. A A A(1-t) A (1-t)+G

  11. A fifth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. (This oven was originally bought for $3G.) It sells $A in pies, and pays no wages or rent, but it does sell the oven for $2G. At the end of the year, the amount the company has in the bank is: • P + A(1-t) + 2G • P + A + 2G(CSF) • P + A(1-t) + 2G(CSF) • P + (A+G)(1-t) + G

  12. CCA Recapture You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n) If we now sell it for $S, then: 1. If S < UCC(n), no tax is owed. 2. If P > S > UCC(n), you owe tax on S-UCC(n) 3. If S > P, you owe tax on P – UCC(n), and S-P is a capital gain.

  13. A+G A+G (A+G)(1-t) (A+G) (1-t)+G

  14. A sixth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. (This oven was originally bought for $2G.) It sells $A in pies, and pays no wages or rent, but it does sell the oven for $3G. At the end of the year, the amount the company has in the bank is: • P + A(1-t) + 3G • P + A + 3G(CSF) • P + (A+2G)(1-t) + G(1-t/2) • P + (A+G)(1-t) + G

  15. CCA Recapture You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n) If we now sell it for $S, then: 1. If S < UCC(n), no tax is owed. 2. If P > S > UCC(n), you owe tax on S-UCC(n) 3. If S > P, you owe tax on P – UCC(n), and S-P is a capital gain. (Taxed at half the rate for profits)

  16. A+G A+G (A+G)(1-t) (A+G) (1-t)+G+G(1-t/2)

  17. I have a profitable company, and have just calculated the CTF to be used in after-tax analyses of possible expansion plans. Now I learn that inflation is predicted to be higher than I expected during the coming few years. If I correct my calculations to take inflation into account, the inflation-adjusted CTF will be: • Higher than the original CTF • Lower than the original CTF • Unchanged • Can’t say without additional information

  18. I have a profitable company, and have just calculated the CTF to be used in after-tax analyses of possible expansion plans. Now I learn that inflation is predicted to be higher than I expected during the coming few years. If I correct my calculations to take inflation into account, the inflation-adjusted CTF will be: • Higher than the original CTF • Lower than the original CTF • Unchanged • Can’t say without additional information

  19. If the taxation rate for a company increases, the value of the CTF for that company will: • Increase • Decrease • Remain the same • Can’t tell without more information

  20. If the taxation rate for a company increases, the value of the CTF for that company will: • Increase • Decrease • Remain the same • Can’t tell without more information

  21. If a company learns that there will be inflation over the next few years, the value of the CTF it uses in its after-tax analyses will: • Increase • Decrease • Remain the same • Can’t tell without more information

  22. If a company learns that there will be inflation over the next few years, the value of the CTF it uses in its after-tax analyses will: • Increase • Decrease • Remain the same • Can’t tell without more information

  23. I have just calculated the IRR for a project, using a pre-tax analysis. If I am taxed at 50%, when I calculate the after-tax IRR, it will be: • Higher than the pre-tax IRR • Lower than the pre-tax IRR • Unchanged • Can’t say without additional information

  24. After-tax IRR lower S P S(1-t) P * CTF

  25. After-tax IRR higher S P S (capital gain) P * CTF

  26. I have just calculated the IRR for a project, using a pre-tax analysis. If I am taxed at 50%, when I calculate the after-tax IRR, it will be: • Higher than the pre-tax IRR • Lower than the pre-tax IRR • Unchanged • Can’t say without additional information

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