Zazu Company Is Considering Modifying a Transaction to Reduce the Current

question 70

Multiple Choice

Zazu Company is considering modifying a transaction to reduce the current year tax cost by $50,000. Which of the following statements is false?

• A) The modification will increase the NPV of the transaction by $50,000.
• B) The modification may affect the transaction's before-tax cash flows.
• C) The modification may reduce the tax cost but increase one or more nontax costs.
• D) The modification may not be desirable even though it reduces the tax cost.

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Definitions:

AAA Corporate Bonds

The highest quality bonds issued by corporations with a strong ability to repay the debt, making them low-risk investments.

Interest Rates

The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal, typically on an annual basis.

Pure Expectations Hypothesis

A theory that suggests that the interest rates on long-term bonds will equal an average of current and future short-term interest rates.

Yield Curve

A graphical representation showing the relationship between the interest rates on debts of different maturities, typically of government bonds, highlighting investors' expectations for future interest rates and economic conditions.