A Firm Will Maximize the Present Value of Future Profits

question 8

Multiple Choice

A firm will maximize the present value of future profits by maximizing current profits when the:

• A) growth rate in profits is constant.
• B) growth rate in profits is larger than the interest rate.
• C) interest rate is larger than the growth rate in profits and both are constant.
• D) growth rate and interest rate are constant and equal.

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Definitions:

Marginal Tax Rate

The rate at which the next dollar of taxable income is taxed, indicating the impact of the last dollar earned on one's tax obligations.

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.

CCA Class

Refers to the classification system for capital cost allowance purposes in Canada, determining the rate at which assets can be depreciated for tax purposes.

Marginal Tax Bracket

The tax rate that applies to the final dollar of taxable income for a person or organization.