preview

Chapter 2

Satisfactory Essays
Open Document

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 …show more content…

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&T bonds, which yield 7.5%, state of Florida municipal bonds, which yield 5% (but are not taxable), and AT&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&T Corporate binds = 7.5% (1-.35) = 4.875%
After tax yield AT&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&T preferred = $53.70 / $1,000 = 5.37%

AT&T preferred stock is the best alternative

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

Get Access
Related
Get Access