Question

The Shrieves's Corporation has $10,000, that it plans to invest in marketable securities. 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 Preferred stock, with a dividend yield of 6%. Shrieves's corporation tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

Answer 1

4.875%; 5.37%; 5%

Step-by-step explanation:

Given that,

Invest = $10,000

AT&T bonds = 7.5%

State of Florida muni bonds = 5%

AT&T preferred stock = 6%

Corporate tax rate = 35%

After taxes:

AT&T bonds:

= 7.5% × $10,000

= $750

Taxes:

= 35% × $750

= $262.50

Yield AT&T bonds:

= [($750 - $262.50) ÷ $10,000] × 100

= [$487.50 ÷ $10,000] × 100

= 4.875%

AT&T preferred stock:

= 6% × $10,000

= $600

Tax exemption:

= 70% × $600

= $420

Taxable = $600 - $420

= $180

Taxes:

= 35% × $180

= $63

Yield AT&T preferred stock:

= [($600 - $63) ÷ $10,000] × 100

= [$537 ÷ $10,000] × 100

= 5.37%

state of Florida muni bonds = 5%

Muni bonds = 5% × $10,000

= $500

They are not taxable, so there is no tax deduction.

Yield state of Florida muni bonds:

= [$500 ÷ $10,000] × 100

= [$500 ÷ $10,000] × 100

= 5%