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If employers are risk-neutral and employees are risk-averse, why is a salary contract optimal, ignoring tax and asymmetric information considerations?
What is an “identification problem”? Illustrate conditions under which there might be an identification problem.
What role do hidden-action problems play in causing the borrowing rate for funds to be greater than the lending rate?
What is clientele-based arbitrage? Provide an example of such a strategy. Is clientele-based arbitrage restricted to high-tax-bracket taxpayers?
List some tax-rule restrictions that prevent organizational-form arbitrage. How do they succeed in preventing this arbitrage?
What restrictions are necessary to prevent pensions from being used in this manner?
What restrictions are in place to limit taxpayers’ abilities to avoid taxes from undertaking these strategies?
Prepare a sales budget, by month and in total , for the third quarter. Also prepare a schedule of expected cash collections , by month and in total.
The bond has a remaining maturity of 5 years, promises to pay 6% interest annually (assume the coupon interest is payable annually).
If the before-tax rate of return on a riskless fully taxable bond is 7% and the before-tax rate of return on a riskless tax-favored asset is 5%.
Calculate the implicit and explicit tax rates for the following three assets. The required pretax total rate of return Ro for asset.
If half the interest earned on the savings portion of an insurance policy were taxable, would it still be possible for taxpayers.
What is the implicit tax rate on this strategy? How does it arise and where does it go? Would every taxpayer want to use this strategy?
What is the optimal investment (the one that maximizes after-tax income) over the range of investment from $0 to $500,000?
How would your answer change if the bonds matured in 30 years rather than in 20 years?
What impediments (both frictions and restrictions) exist to limit your ability to take advantage of this arbitrage possibility?
Assume you face a progressive tax rate system. Show that it does not pay for you to reduce your explicit tax rate on fully taxable income.
Assume you work for a local municipality. Further assume that there are no tax-rule restrictions preventing a municipality.
What is organizational-form arbitrage? Give an example of organizational-form arbitrage that would create infinite wealth for a taxpayer.
How does the concept of implicit taxes apply to investments undertaken in different tax jurisdictions?
If tax rates are changing over time, do pension accounts dominate tax-exempt savings accounts?
Under what circumstances is an investment that is taxed each period at capital gains rates preferred to an SPDA contract.
Why do a pension account and the savings portion of a life insurance product provide the same aftertax rates of return if tax rates.
If tax rates are constant over time, why might a taxpayer prefer to save through a money market account rather than a pension account or a tax-exempt insurance.
Why do rising tax rates make single-premium deferred annuities and pension accounts less attractive relative to ordinary money market accounts.