Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 30, Problem 29PS
Summary Introduction
To determine: Investor’s marginal tax rate and the other factors might affect investor’s choice of two types of securities.
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7) Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni?
5) An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 22% marginal tax bracket, what will be his or her after-tax rates of return on the municipal and corporate bonds?
If a taxpayer's marginal tax rate is 33 percent,
what is the after-tax yield on a corporate bond
that pays 5 percent interest? If the average
marginal tax rate of all taxpayers is 50 per-
cent, will the taxpayer with the 33 percent
marginal tax rate prefer a corporate or a mu-
nicipal security? Assume equivalent safety and
maturity.
Chapter 30 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 2PSCh. 30 - Prob. 3PSCh. 30 - Prob. 4PSCh. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 10PS
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Credit terms Phoenix Lambert currently sells its...Ch. 30 - Prob. 16PSCh. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Prob. 21PSCh. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Money-market yields In Section 30-4 we described a...Ch. 30 - Money-market yields Look again at the previous...Ch. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 33PS
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- An investor is trying to decide between a muni paying 6.20 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? 20.0 percent 66.7 percent 80.0 percent 25.0 percent 75.0 percentarrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her and _, respectively. after-tax rates of return on the municipal and corporate bonds would be 7.2%;7.735% 8.471%:9.1% O 7.2%;9.1% 6.12%;7.735%arrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 7.2%; 9.1% B) 7.2%; 8.008% C) 6.12%; 7.735% D) 8.471%; 9.1% Provide an accurate answer with justification.arrow_forward
- An investor is trying to decide between a muni paying 6.20 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? Group of answer choices 20.0 percent 66.7 percent 80.0 percent 25.0 percent 75.0 percentarrow_forwardA corporation can earn 7.5% if it invests in municipal bonds. The corporation can also earn 8.5% (before-tax) by investing in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate tax rate that makes the corporation indifferent between the two investments? Answer 35.39% 37.25% 39.22% 41.18% 43.24%. Pls correct with steps.arrow_forwardIn order for you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be? A. Cannot be determined from the information given. B. 17.6% C. 27% D. 19.8% E. 22.2%arrow_forward
- Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)arrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 6%; 8% B) 4.5%; 6% C) 4.5%; 8% D) 6%; 6.08%Please provide justificationarrow_forward1. You are in the 30% tax bracket (federal & state taxes combined). A corporate bond is yielding 9%. Assuming that all non-tax features (e.g. risk) are identical, what yield would a municipal bond ("Muni") have to offer in order for you to prefer it over the corporate?arrow_forward
- Suppose you are a wealthy individual paying 35% tax on income. What is the expected after-tax yield on each of the following investments? A municipal note yielding 7.0% pretax. A Treasury bill yielding 11.2% pretax. A floating-rate preferred stock yielding 7.4% pretax. How would your answer change if the investor is a corporation paying tax at 35%?arrow_forwardThe personal tax on interest payments is 33%.The personal tax rate on equity capital gain is 15%.The corporate tax is 35%.Given all these tax rates and all otehr factors are kept constant,will investors have a preference to debt or equity? A.Cannot determine from the information provided B.Debt is preferred to equity C.Equity is preferred to debt D.M-M proposition I holds and the investors are indifferent between debt and equityarrow_forward9) In order for you to be indifferent between the after-tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%, what would your tax bracket need to be? A) 22.6% B) 21.4% C) 26.2% D) 19.8% E) Cannot be determined from the information given. Please provide accurate answer with justification.arrow_forward
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