Anastasia wants to invest $1.5M. Based on her income she is currently in the 33% tax bracket for ordinary income and in the 15% bracket for long-term capital gains. Her tax brackets for state income tax purposes are 7% and 0 % on long-term capital gains. Consider the following situations: Type Time horizon Income Discount rate Repayment/Sale Comments Situation 2 (2) Situation 2: Corporate Bonds 5 years 11% interest annually 5.5% Situation 2 Taxable at ordinary income tax rates; no state income tax Municipal Bonds 7 years 6.5% interest annually 5% Repaid after 5 Repaid after years 7 years Not taxable for federal income tax but state income tax of 7% applies Requirements: Determine the net present value of the after-tax cash flow for: (1) Situation 1:
Anastasia wants to invest $1.5M. Based on her income she is currently in the 33% tax bracket for ordinary income and in the 15% bracket for long-term capital gains. Her tax brackets for state income tax purposes are 7% and 0 % on long-term capital gains. Consider the following situations: Type Time horizon Income Discount rate Repayment/Sale Comments Situation 2 (2) Situation 2: Corporate Bonds 5 years 11% interest annually 5.5% Situation 2 Taxable at ordinary income tax rates; no state income tax Municipal Bonds 7 years 6.5% interest annually 5% Repaid after 5 Repaid after years 7 years Not taxable for federal income tax but state income tax of 7% applies Requirements: Determine the net present value of the after-tax cash flow for: (1) Situation 1:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Anastasia wants to invest $1.5M. Based on her income she is currently in the 33% tax bracket
for ordinary income and in the 15% bracket for long-term capital gains. Her tax brackets for
state income tax purposes are 7% and 0% on long-term capital gains.
Consider the following situations:
Situation 2
Situation 2
Corporate
Municipal
Type
Bonds
Bonds
Time horizon
5 years
7 years
11% interest
6.5% interest
Income
annually
annually
Discount rate
5.5%
5%
Repayment/Sale
Repaid after 5 Repaid after
years
7 years
Taxable at
Not taxable
for federal
ordinary
Comments
income tax
rates; no state
income tax
but state
income tax of
7% applies
income tax
Requirements: Determine the net present value of the after-tax cash flow for:
(1) Situation 1:
(2) Situation 2:
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