Contrast the income tax consequences of the yields on the following investments: a. U.S. Treasury bonds. b. Bonds issued by the State of Illinois. c. Bonds issued by a publicly held corporation at their face value. d. Bonds issued by a publicly held corporation at a discounted value. e. Preferred stock issued by a publicly held corporation. f. Shares issued by a mutual fund.

Question

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Answer 1

Textbook Question

Chapter 16, Problem 1QPD

Contrast the income tax consequences of the yields on the following investments:

a. U.S. Treasury bonds.
b. Bonds issued by the State of Illinois.
c. Bonds issued by a publicly held corporation at their face value.
d. Bonds issued by a publicly held corporation at a discounted value.
e. Preferred stock issued by a publicly held corporation.
f. Shares issued by a mutual fund.

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

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Students have asked these similar questions

Which of the following is CORRECT? Select one: a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM. d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. e. All of the above are correct. Which of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…

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Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. Interest on bonds is tax deductible.

Answer 2

Textbook Question

Chapter 16, Problem 1QPD

Contrast the income tax consequences of the yields on the following investments:

a. U.S. Treasury bonds.
b. Bonds issued by the State of Illinois.
c. Bonds issued by a publicly held corporation at their face value.
d. Bonds issued by a publicly held corporation at a discounted value.
e. Preferred stock issued by a publicly held corporation.
f. Shares issued by a mutual fund.

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

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Answer 3

Textbook Question

Chapter 16, Problem 1QPD

Contrast the income tax consequences of the yields on the following investments:

a. U.S. Treasury bonds.
b. Bonds issued by the State of Illinois.
c. Bonds issued by a publicly held corporation at their face value.
d. Bonds issued by a publicly held corporation at a discounted value.
e. Preferred stock issued by a publicly held corporation.
f. Shares issued by a mutual fund.

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

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Answer 4

Textbook Question

Chapter 16, Problem 1QPD

Contrast the income tax consequences of the yields on the following investments:

a. U.S. Treasury bonds.
b. Bonds issued by the State of Illinois.
c. Bonds issued by a publicly held corporation at their face value.
d. Bonds issued by a publicly held corporation at a discounted value.
e. Preferred stock issued by a publicly held corporation.
f. Shares issued by a mutual fund.

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

Answer 8

a.

Expert Solution

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

To determine

Indicate the income tax consequence for the Country U Treasury bonds.

Answer 13

Explanation of Solution

The interest from Country U’s treasury bonds is considered as the taxable income for federal purposes however tax-exempt for state purposes.

Answer 14

b.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

To determine

Indicate the income tax consequence for the bonds issued by the State I.

Answer 19

Explanation of Solution

The interest from the State I bonds is tax-exempt for federal purposes however it might be taxable income or tax-exempt income for state purposes and it depends on the taxpayer’s state of residence.

Answer 20

c.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

Answer 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their face value.

Answer 25

Explanation of Solution

The specified interest paid for the corporate bonds is considered as the taxable income for federal and state purposes.

Answer 26

d.

Expert Solution

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

Answer 27

d.

Expert Solution

Answer 28

d.

Expert Solution

Answer 29

Expert Solution

Answer 30

To determine

Indicate the income tax consequence for the bonds issued by the bonds issued by a publicly held corporation at their discounted value.

Answer 31

Explanation of Solution

The specified interest paid for the corporate bonds and the amortization of the OID (Original issue discount) is considered as the taxable income for federal and state purposes.

Answer 32

e.

Expert Solution

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

Answer 33

e.

Expert Solution

Answer 34

e.

Expert Solution

Answer 35

Expert Solution

Answer 36

To determine

Indicate the income tax consequence for the preferred stock which is issued by the publicly held corporation.

Answer 37

Explanation of Solution

The dividend which is on the preferred stock is considered as the taxable income for the federal and state purposes. The qualified dividends income is taxable at the preferential federal rate.

Answer 38

f.

Expert Solution

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

Answer 39

f.

Expert Solution

Answer 40

f.

Expert Solution

Answer 41

Expert Solution

Answer 42

To determine

Indicate the income tax consequence for the shares that are issued by a mutual fund.

Answer 43

Explanation of Solution

The ordinary dividends which are paid by the mutual funds are the combination of ordinary taxable income, capital gain distributions and qualified dividend income. The qualified dividend income and capital gain distributions are taxed at a special federal rate.

Answer 44

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