A Stationery Company Plans to Launch a New Type of Indelible

question 37

Multiple Choice

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes?

• A) It will increase taxes by $8 million.
• B) It will increase taxes by $2.8 million.
• C) It will have no effect on taxes.
• D) It will reduce taxes by $2.8 million.

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Definitions:

Available-for-sale Debt Portfolio

A categorization of debt investments not classified as held-to-maturity or trading securities, which can be sold prior to maturity.

Unrealized Loss

A financial situation where an investment holds a lower market value than its purchasing price, yet the investor has not actually sold it to incur a realized loss.

Amortized Cost

The initial investment cost adjusted for amortization or depreciation over the period of the investment.

Effective Interest Rate

The real cost of borrowing after adjusting for compounding interest and all fees. It provides a more accurate representation of the actual financial charge associated with a loan.