Question

Suppose a​ firm's tax rate is 35%.

1. What effect would a $9.74 million operating expense have on this​ year's earnings? What effect would it have on next​ year's earnings?  ​(Select all the choices that​ apply.)

A. A $9.74 million operating expense would be immediately​ expensed, increasing operating expenses by $9.74 million. This would lead to a reduction in taxes of 35 % times $ 9.74 million equals $ 3.41 million 35%×$9.74 million=$3.41 million.

B. A $9.74 million operating expense would be immediately​ expensed, increasing operating expenses by $9.74 million. This would lead to an increase in taxes of 35 % times $ 9.74 million equals $ 3.41 million 35%×$9.74 million=$3.41 million.

C.Earnings would decline by $ 9.74 million minus $ 3.41 million equals $ 6.33 million$9.74 million−$3.41 million=$6.33 million. The same effect would be seen on next​ year's earnings.

D.Earnings would decline by $ 9.74 million minus $ 3.41 million equals $ 6.33 million$9.74 million−$3.41 million=$6.33 million. There would be no effect on next​ year's earnings.

2. What effect would a $8.2 million capital expense have on this​ year's earnings if the capital expenditure is depreciated at a rate of $1.64 million per year for five​ years? What effect would it have on next​ year's earnings? (Select all the choices that​ apply.)

A. Capital expenses do not affect earnings directly.​ However, the depreciation of $1.64 million would appear each year as a capital expense.

B.Capital expenses do not affect earnings directly.​ However, the depreciation of $1.64 million would appear each year as an operating expense.

C.With a reduction in taxes of 35 % times $ 1.64 million equals $ 0.57 million 35%×$1.64 million=$0.57 million​, earnings would be lower by $ 1.64 million minus $ 0.57 million equals $ 1.07 million$1.64 million−$0.57 million=$1.07 million for each of the next 5 years.

D.With an increase in taxes of 35 % times $ 1.64 million equals $ 0.57 million 35%×$1.64 million=$0.57 million​, earnings would be higher by $ 1.64 million minus $ 0.57 million equals $ 1.07 million$1.64 million−$0.57 million=$1.07 million for each of the next 5 years.

Answer 1

1

A $9.74 million operating expense would be immediately expensed, increasing operating expenses by $9.74 million.

Reduction in taxes = 35% * $9.74 million

Reduction in taxes = $3.41 million

Earnings decline = 9.74 - 3.41

Earnings decline = $6.33 million

There would be no effect on next year's earnings, as it is a operating expense

Correct Answers

D.Earnings would decline by $ 9.74 million minus $ 3.41 million equals $ 6.33 million$9.74 million−$3.41 million=$6.33 million. There would be no effect on next​ year's earnings

A. A $9.74 million operating expense would be immediately​ expensed, increasing operating expenses by $9.74 million. This would lead to a reduction in taxes of 35 % times $ 9.74 million equals $ 3.41 million 35%×$9.74 million=$3.41 million.

2

What effect would a $8.2 million capital expense have on this​ year's earnings if the capital expenditure is depreciated at a rate of $1.64 million per year for five​ years? What effect would it have on next​ year's earnings?

Capital expenses do not affect earnings directly. However, the depreciation would appear each year as an operating expense.

Reduction in taxes = 1.64 million * 35%

Reduction in taxes = $0.574 million

Earnings decline by = 1.64-0.574

Earnings decline by = $1.067 million

Earnings would be lower by $1.067 million for each of the next 5 years.

Correct Answers

B.Capital expenses do not affect earnings directly.​ However, the depreciation of $1.64 million would appear each year as an operating expense.

C.With a reduction in taxes of 35 % times $ 1.64 million equals $ 0.57 million 35%×$1.64 million=$0.57 million​, earnings would be lower by $ 1.64 million minus $ 0.57 million equals $ 1.07 million$1.64 million−$0.57 million=$1.07 million for each of the next 5 years.