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 2P
Summary Introduction
To determine: Personal tax rate.
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If the municipal bond rate is 6% and the corporate bond rate is 8%, what is the marginal tax rate, assuming investors are indifferent between the two bonds?
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1. What is your after-tax return from holding a one-year corporate bond with a yield of 5.25 percent? (1
pt)
2. What is your after-tax return from a holding a one-year municipal bond with a yield of 4 percent? (1 pt)
3. How would you decide which bond to hold? (Assume that Both bonds carry the same risk.) (1 pt)
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?
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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- Corporate bonds issued by Johnson Corporation yield 8% interest at this time. Equal risk municipal bonds yield 6%. At what tax rate would an investor be indifferent to buying one or the other?arrow_forwardAn investor is trying to decide between a muni paying 5.75% or an equivalent taxable corporate paying 8.25%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? A. 30.00% B. 25.00% C. 66.67% D. 20.00%arrow_forwardC) Suppose that the interest rate on a taxable corporate bond is 9% and that the marginal tax is 28%. Suppose a tax-free municipal bond with a rate of 6.75% was available. Which security would you choose?arrow_forward
- 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?arrow_forwardSuppose the interest rate on a taxable corporate bond is 4 percent while a municipal, tax exempt bond has an interest rate of 3 percent, and they are similar in every other way. Assuming the income tax rate is 30 percent, calculate the after tax interest rate on the corporate bond. Is it higher or lower than the after tax return on the municipal bond?arrow_forwardA corporate bond currently yields 8.70%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.50%. At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places.) O 30.90% 33.10% 36.78% O 41.56% O 41.93%arrow_forward
- What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 4.1 percent for an investor in the 28 percent marginal tax bracket?arrow_forwardMunicipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured. Your marginal tax rate is 28 percent and the inflation rate is 1.645%. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent. How would your answers change if your marginal tax rate falls to 13.5% and the inflation rate increases to 2.0639%? What would happen to the YTM of the uninsured bond if negative news was announced resulting in a decline in its credit rating? What would happen to the YTM of the insured bond if it suddenly lost its insurance?arrow_forwardCalculate the after-tax return of a(n) 5.625.62 percent, 20-year, A-rated corporate bond for an investor in the 1515 percent marginal tax bracket. Compare this yield to a(n) 3.683.68 percent, 20-year, A-rated, tax-exempt municipal bond, and explain which alternative is better. Repeat the calculations and comparison for an investor in the 3535 percent marginal tax bracket.arrow_forward
- The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be indifferent between the two bonds?arrow_forwardb) You can invest in taxable bonds that are paying a yield of 9.50% or a municipal bond paying a yield of 7.75%. If your marginal tax rate is 21%, which security bond should you buy? Answer:arrow_forwardAn 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.arrow_forward
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