Ch01: TaBS

Question 1

Are taxes paid even if something is tax-exempt?

Answer 1

Yes, the tax-exempt entity pays taxes via accepting a lower pretax rate-of-return (R) than the higher R it would receive on a taxed asset; the higher R is the discount rate (opportunity cost)

Question 2

Who are the taxes paid to under a tax-exemption?

Answer 2

Taxes are paid to the municipality issuing the tax-exempt bond

Question 3

Implicit Taxes

Answer 3

[{(Pretax discount rate) - (tax-exempt Pretax R)} / (Pretax discount rate)]
Implicit taxes = the marginal tax rate {t} that would’ve been applied to the tax-exempt asset

Question 4

Expected Payoff, E(p)

Answer 4

E(p) x Pr(success)

Question 5

Pretax Rate of Return, R

Answer 5

[E(p) - Investment] / Investment

[E(p) - Investment] = EBT

Question 6

After-tax rate of return, r

Answer 6

[(E(p)) x {1 - t}) - (Investment x {1-tx})] / (Investment x {1-tx})