# Chapter 2

1270 Words6 Pages
Ryan Jobe
Chapter 2
Problems 1-11

1. An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?

Corporate Bond yield is 9%
The after tax yield is the return after taxes are deducted.
Therefore the bonds after tax yield = 9% (1-T) = 9% (1-.36)
Or 5.76%

2. Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds? You want the rate that equals the municipal tax exempt yield to the corporate after tax yield. 8% (1-T) = after tax corporate yield 6% = municipal tax exempt yield
Assume the firm receives an additional \$1 million of interest income from some bonds it owns. What is the tax on this interest income?

Tax =.35 (\$1,000,000) = \$350,000

c. Now assume that Wendt does not receive the interest income but does receive an additional \$1 million as dividends on some stock it owns. What is the tax on this dividend income?

Tax = .35 (.30 * \$1,000,000)
Tax = .35 (\$300,000)
Tax = \$105,000

9. The Shrieves Corporation has \$10,000 that it plans to invest in marketable securities. It is choosing among AT&amp;T bonds, which yield 7.5%, state of Florida municipal bonds, which yield 5% (but are not taxable), and AT&amp;T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

The after tax yield on the Florida Municipal bonds = 5%
The after tax yield on the AT&amp;T Corporate binds = 7.5% (1-.35) = 4.875%
After tax yield AT&amp;T preferred: \$1,000 of preferred
Annual Dividend: \$1,000 * 6% = \$60 \$60 * 70% = \$42 is exempt from taxes
\$60 - \$42 = \$18 is taxable, your tax is \$18 * .35 = \$6.30
Net after tax dividend = \$60 - \$6.30 = \$53.70
Your after tax yield on of AT&amp;T preferred = \$53.70 / \$1,000 = 5.37%

AT&amp;T preferred stock is the best alternative

10. The Moore Corporation has operating income (EBIT) of