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?
Assume that the return on tax-exempt securities is 0.09 and that tp = 0.3, tg = 0.15, and te = 0.35, where tg is the rate on capital gains, te is the
corporate tax rate, and to is the personal tax rate on dividends and interest. Equilibrium conditions exist.
a. The return to investors on taxable bonds raised as new capital can be expected to be
b. The return to investors on common stock (all capital gains) raised as new capital can be expected to be
c. If taxable debt is issued, the company will have to earn
before tax, and if common stock is issued the firm will have to
earn
before tax.
d. If taxable debt is issued, the company will have to earn
before tax, and if common stock is issued the firm will have to
earn
before tax.
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?
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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- Calculate 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_forward5) 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?arrow_forwardIf 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.arrow_forward
- Suppose your marginal federal income tax rate is 25 percent. 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)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 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_forwardSuppose 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_forward
- Yieldarrow_forwardIf a 5 yr. AA- General Dynamics note is yielding a 35% tax bracket investor 7.56125% while a comparable maturity note from Philadelphia, Pennsylvania is yielding 4.8735%. If the inflation rate is 2.2765%, which bond would the investor prefer and why? If the marginal tax rate for the investor increases to 38.95%, which bond would the investor prefer? What is the critical tax rate?arrow_forward1. Calculate the market value of debt and the cost of debt for the company.arrow_forward
- Municipal 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_forwardAn investor purchases one municipal bond and one corporate bond that pay rates of return of 9% and 10.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.arrow_forward7. Zero-coupon bonds are the best way for high-income taxpayers to extract maximum value from tax-exempt state and local government bonds because: a.Zero-coupon bonds are sold for nearly their full face value and provide most of their income in the form of interest. b.Zero-coupon bonds allow the investor to make additional tax-exempt investments. c.The interest earned on the accumulated principal and interest is not tax-exempt. d.The investments pay interest continually. e.Zero-coupon bonds include more transaction fees.arrow_forward
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