Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 6, Problem 2P
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?
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Students have asked these similar questions
A municipal bond has a yield to maturity of 3.8 percent. What corporate bond yield would make an investor in the 29 percent tax bracket indifferent between two bonds, all else the same?
An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the 22 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason?
a.
The ABC bond because it pays a 9 percent interest rate, while the municipal bond only pays 7.9 percent.
b.
None of these is correct.
c.
The ABC bond because it pays an equivalent after-tax rate of 11.5 percent, while the municipal bond pays out an equivalent after-tax rate of 10.1 percent.
d.
The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an after-tax 7.02 percent interest rate.
e.
The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an equivalent after-tax rate of 2.0 percent.
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table bel If the corporate tax rate is 22 percent, what is the aftertax cost of the company's debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Aftertax cost of debt
Chapter 6 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 6 - Prob. 2QCh. 6 - If a “typical” firm reports $20 million of...Ch. 6 - Prob. 4QCh. 6 - What is operating capital, and why is it...Ch. 6 - Explain the difference between NOPAT and net...Ch. 6 - Prob. 7QCh. 6 - Prob. 8QCh. 6 - Prob. 1PCh. 6 - Corporate bonds issued by Johnson Corporation...Ch. 6 - Prob. 3P
Ch. 6 - Talbot Enterprises recently reported an EBITDA of...Ch. 6 - Kendall Corners Inc. recently reported net income...Ch. 6 - In its most recent financial statements,...Ch. 6 - Prob. 7PCh. 6 - Prob. 8PCh. 6 - Prob. 9PCh. 6 - The Moore Corporation has operating income (EBIT)...Ch. 6 - The Berndt Corporation expects to have sales of 12...Ch. 6 - Prob. 12PCh. 6 - What effect did the expansion have on sales and...Ch. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - What is Computron’s free cash flow (FCF)? What are...Ch. 6 - Calculate Computron’s return on invested capital...Ch. 6 - Cochran also has asked you to estimate Computrons...Ch. 6 - Prob. 8MCCh. 6 - Assume that a corporation has $100,000 of taxable...Ch. 6 - Prob. 10MC
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- An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?arrow_forwardA municipal bond carries a coupon of 6.75% and is trading at par. What is the equivalent taxable yield to a taxpayer in a combined federal plus state 34% tax bracket?arrow_forwardA municipal bond carries a coupon rate of 4.25% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket? (Round your answer to 2 decimal places.)arrow_forward
- The Shrieves Corporation has $10,000 that it plans to invest in marketablesecurities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferredstock, with a dividend yield of 6%. The corporate tax rate is 35%, and 70% ofthe dividends received are tax exempt. Find the after-tax rates of return on allthree securities.arrow_forwardAssume a municipal bond has a yield of 5.75% and corporate bond of comparable maturity and credit rating has a yield of 7%. For each marginal tax rate below calculate the after tax yield for the municipal bond and the corporate bond Type your answer below as a percentage (not decimals) 10% Muni: Corporate: * 20% Muni:! Corporate: Corporate 25% Muni: Muni:| Corporate: · 30%arrow_forwardCharter Corp. has issued1,697debentures with a total principal value of $1,697,000. The bonds have a coupon interest rate of 6%. _______________________________________________________________________ a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 35% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue? a The dollar amount of interest per bond an investor can expect to receive each year from Charter is $___________. (Round to the nearest dollar.) b. Charter's total interest expense per year associated with this bond issue is $__________. (Round to the nearest dollar.) c. Assuming that Charter is in a 35% corporate tax bracket, the company's net after-tax interest cost associated with this bond issue is $nothing. (Round to the…arrow_forward
- Charter Corp. has issued 1,554 debentures with a total principal value of $1,554,000. The bonds have a coupon interest rate of 9%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 39% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?arrow_forwardA Corporation believes that it can sell long term-bonds with an 8% coupon rate, although the effective rate is 10%. If such bonds are part of A Corporation’s financing plans for next year, what is the after-tax (30% tax rate) cost of bonds for purposes of calculating the corporation’s cost of capital. A. 5.44% B. 7% C. 10% D. 14.00%arrow_forwardA Corporation believe that it can sell long term-bonds with an 8% coupon rate, although the effective rate is 10%. If such bonds are part of A Corporation’s financing plans for next year, what is the after-tax (35% tax rate) cost of bonds for purposes of calculating the corporation’s cost of capital. a. 6.5% b. 5.2% c. 7.0% d. 10%arrow_forward
- 1. Suppose the state of Indiana issued a tax-exempt bond to pay for student fees in its universities. The bond currently has a yield of 0.8 percent. 2. Suppose Mike is paying a marginal tax rate of 20% and Peter is paying a marginal tax rate of 30%. Calculate the equivalent taxable yields of this bond to both Mike and Peter. Mike: 0.8/(1-.2)=1 Peter: 0.8/(1-.3)= 2.67 3. Suppose that the yield on a Baa-rated corporate bond, a bond with the same credit rating as the state of Indiana, is 1.4 percent. Calculate the yield ratio between the tax-exempt bond vs the taxable bond, and briefly interpret what the yield ratio implies.arrow_forwardYing Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 34 percent, what is the aftertax cost of Ying's debt? Bond Coupon Rate Price Quote Maturity Face Value 1 6.4% 100 3 years $ 18,000,000 2 7.4 107 6 years 39,000,000 3 6.7 97 19 years 46,000,000 4 7.8 107 31 years 64,000,000arrow_forwardBonds issued last year by Gowen Inc. carried a coupon rate of 7%. Bonds issued today by Gowen Inc. would carry a coupon rate of 9%. Assume a corporate tax rate of 40%.What is the after tax cost of debt?arrow_forward
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