Corporate Finance: A Focused Approach (mindtap Course List)
7th Edition
ISBN: 9781337909747
Author: Michael C. Ehrhardt, Eugene F. Brigham
Publisher: South-Western College Pub
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Chapter 2, Problem 12P
Summary Introduction
To determine: After-tax
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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.
The Carey State Bank has purchased a bank-qualified municipal bond with a yield of 6%. This bank has had to borrow funds to make this purchase at a cost of 5.35%. This bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond? Under IRS rules if a muni bond is bank qualified then 80% of the interest expense associated with funding the investment is tax deductible.
A. none of the responses are correct
B. 2.85%
C. 2.36%
D.6.00%
E. 2.43%
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Chapter 2 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
Ch. 2 - Prob. 1QCh. 2 - Prob. 2QCh. 2 - Prob. 3QCh. 2 - Prob. 4QCh. 2 - Prob. 5QCh. 2 - Prob. 6QCh. 2 - Prob. 7QCh. 2 - Prob. 8QCh. 2 - Prob. 1PCh. 2 - Prob. 2P
Ch. 2 - Hollys Art Galleries recently reported 7.9 million...Ch. 2 - Prob. 4PCh. 2 - Prob. 5PCh. 2 - Prob. 6PCh. 2 - Zucker Inc. recently reported 4 million in...Ch. 2 - Prob. 8PCh. 2 - Prob. 9PCh. 2 - Prob. 10PCh. 2 - Prob. 11PCh. 2 - Prob. 12PCh. 2 - Prob. 13PCh. 2 - Prob. 14PCh. 2 - Prob. 15PCh. 2 - Prob. 16PCh. 2 - Prob. 17PCh. 2 - Rhodes Corporations financial statements are shown...Ch. 2 - The Bookbinder Company had 500,000 cumulative...Ch. 2 - Jenny Cochran, a graduate of the University of...Ch. 2 - Prob. 2MCCh. 2 - Prob. 3MCCh. 2 - Prob. 4MCCh. 2 - Prob. 5MCCh. 2 - Prob. 6MCCh. 2 - Prob. 7MCCh. 2 - Prob. 8MCCh. 2 - Prob. 9MCCh. 2 - Prob. 10MCCh. 2 - Prob. 12MC
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- Solarcell Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between AT&T bonds that yield 11%, State of Florida municipal bonds that yield 8%, and AT&T preferred stock with a dividend yield of 9%. Solarcell's corporate tax rate is 29.00 %, and 70% of the preferred stock dividends it receives are tax exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security. a. 8.71% b.8.46% c. 7.56% Od. 6.41% .8.22%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_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_forward
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