In: Finance
Personal After-Tax Yield
Corporate bonds issued by Johnson Corporation currently yield 10.5%. Municipal bonds of equal risk currently yield 5.5%. At what tax rate would an investor be indifferent between these two bonds? Round your answer to two decimal places.
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Corporate After-Tax Yield
The Shrieves Corporation has $25,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 9.75%, state of Florida muni bonds, which yield 6% (but are not taxable), and AT&T preferred stock, with a dividend yield of 8.25%. Shrieves' corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Round your answers to two decimal places.
After-tax rate of return on AT&T bond: %
After-tax rate of return on Florida muni bonds: %
After-tax rate of return on AT&T preferred stock: %
Personal Tax Yield :
Tax Rate = 47.62%
Muncipal Bonds Exempt from Tax so return after tax equals to 5.5%
for Corporate Bonds Before Tax Return = 10.5% , After Tax we require return same as municipal bonds i.e. 5.5%
Suppose i invest 100 Now, i will get after tax 5.5 abd before tax 10.5 so, my Tax amount equals to 5
5.5=10.5-5 whereas, 5 is total tax Paid to convert to %
5/10.5*100 = 47.62%
Corporate Tax Yield
After-tax rate of return on AT&T bond: 3.41%
After-tax rate of return on Florida muni bonds:
6.00%
After-tax rate of return on AT&T preferred stock:
7.38%
For Calculating After Tax Rate of Return
Return on Investment - Tax % apply on ROI = After Tax Return
AT & T bonds : 9.75 - 3.41(35% on 9.75) = 6.34%
State of Florida muni bonds :; 6% ( After Tax as well 6% as the same is tax free)
AT&T preferred stock : 8.25 - 0.87 ( Tax Rate 10.5% (of 35 % Tax 70 % is Exempt, so 35*70%=10.5%) = 7.38%