QUESTION 12 Ms. Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%, which, if any, of the following three statements is false? Ms. Lenz’s annual before-tax cash flow from this investment is $9,000 O If the interest is tax-exempt, Ms. Lenz’s annual after-tax cash flow is $9,000 OIf the interest is taxable, Ms. Lenz’s annual after-tax cash flow is $6,750 O None of the above is false QUESTION 13 Which, if any, of the following three statements about marginal tax rates is false? A taxpayer’s marginal rate does not change over time O As the marginal rate decreases, the after-tax cost of a deductible expense decreases As the marginal rate decreases, the after-tax value of an income-generating transaction increases Statements a and b are false QUESTION 14 Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate S120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal O 15% O 20% O 25% ○ 30%

## Expert Answer

Solution.

Q12.

The correct option is D. None of the above is false.

Option a is correct because before tax return from investment is really $9,000 ($100,000 x 9%).

Option B is correct because if tax are exempt than after tax cash flow is $9,000 ($100,000 x 9%)

Option C is correct because if interest is taxable than after tax cash inflow is ($9,000 x 0.75) $6,750.

**Thus Option d is correct.**