Question

If you earn 6% rate of return while the rate of inflation is 4% and the tax rate is 50%, after one year you

a. Would have less purchasing power
b. Would have more money
c. Would pay more in taxes than you earn after inflation

d. All of the above

38. If a firm uses Factoring to obtain Short-Term Financing

a. It exploits its vendors to obtain funds
b. It pledges Accounts Receivable to borrow funds

c. It sells Accounts Receivable to obtain funds

d. It obtains temporary funds through its Line of Credit

Answer 1

If rate of return is 6% and tax rate is 50%, after-tax return= 6*50%= 3%

Since inflation is 4%, prices will increase by 4%. Therefore, after one year, we will have less purchasing power.

Since after tax return is 3%, there will be more money (though its purchasing power will be less)

Earnings after inflation will be after-tax return less inflation, ie., 3%-4%= -1%. But tax paid will be 3%. Hence we will be paying more in taxes than the earnings after inflation.

All the given statements are true. The answer is option (d) given.

Question 38:

Factoring involves sale of receivables to obtain funds. The answer is option (c) given.