Question
In: Finance
Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 9.8 percent interest,...
Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 9.8 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?
Solutions
Expert Solution
To be indifferent between two bonds,
tax free yield = taxable yield * (1 - tax rate)
tax free yield = 9.8% * (1 - 24%) = 7.45%
jeff jeffy answered 2 years agoRelated Solutions
Use the following information for Taco Swell, Inc., (assume the tax rate is 24 percent): ...
Use the following information for Taco Swell, Inc., (assume the
tax rate is 24 percent):
2017
2018
Sales
$
24,549
$
19,248
Depreciation
2,536
2,644
Cost of goods sold
6,490
6,891
Other expenses
1,455
1,258
Interest
1,190
1,405
Cash
8,756
9,727
Accounts receivable
11,648
13,962
Short-term notes payable
1,834
1,801
Long-term debt
29,540
35,629
Net fixed assets
73,137
78,090
Accounts payable
6,365
7,120
Inventory
20,696
22,022
Dividends
2,779
2,474
For 2018, calculate the cash flow from assets, cash flow...
Use the following information for Ingersoll, Inc. Assume the tax rate is 24 percent. 2018...
Use the following information for Ingersoll, Inc. Assume the
tax rate is 24 percent.
2018
2019
Sales
$
21,573
$
18,936
Depreciation
1,861
1,936
Cost of goods sold
4,979
4,907
Other expenses
1,046
924
Interest
895
1,026
Cash
6,367
7,066
Accounts receivable
8,240
10,027
Short-term notes payable
1,370
1,347
Long-term debt
20,920
25,136
Net fixed assets
51,328
54,873
Accounts payable
4,704
5,244
Inventory
14,623
15,488
Dividends
1,950
1,818
Prepare a balance sheet for this company for 2018 and...
Suppose the corporate tax rate is 35%, and investors pay a tax rate of 15% on...
Suppose the corporate tax rate is
35%,
and investors pay a tax rate of
15%
on income from dividends or capital gains and a tax rate of
37.3%
on interest income. Your firm decides to add debt so it will pay
an additional
$20
million in interest each year. It will pay this interest expense
by cutting its dividend.
a. How much will debt holders receive after paying taxes on the
interest they earn?
b. By how much will the...
Suppose the corporate tax rate is 38%, and investors pay a tax rate of 15% on...
Suppose the corporate tax rate is 38%, and investors pay a tax
rate of 15% on income from dividends or capital gains and a tax
rate of 30.1% on interest income. Your firm decides to add debt so
it will pay an additional $20 million in interest each year. It
will pay this interest expense by cutting its dividend. a. How much
will debt holders receive after paying taxes on the interest they
earn? b. By how much will the...
Use the following information for Ingersoll, Inc. Assume the tax rate is 24 percent. 2018 2019...
Use the following information for Ingersoll, Inc. Assume the tax
rate is 24 percent.
2018
2019
Sales
$17,573
$16,536
Depreciation
1,781
1,856
Cost of Good Sold
4,579
4,827
Other Expenses
1,006
884
Interest
855
986
Cash
6,247
6,826
Account Receivable
8,160
9,787
Short-term notes payable
1,290
1,267
Long-term debt
20,680
24,936
Net Fixed assets
51,152
54,633
Accounts payable
4,576
5,004
Inventory
14,487
15,408
Dividends
1,550
1,738
Prepare a balance sheet for this company for 2018 and 2019. (Do
not round...
Use the following information for Ingersoll, Inc. Assume the tax rate is 24 percent. 2018 2019...
Use the following information for Ingersoll, Inc. Assume the tax
rate is 24 percent.
2018
2019
Sales
$
26,549
$
19,368
Depreciation
2,576
2,684
Cost of goods sold
6,690
6,931
Other expenses
1,483
1,278
Interest
1,210
1,425
Cash
8,776
9,847
Accounts receivable
11,688
14,082
Short-term notes payable
1,874
1,841
Long-term debt
29,660
35,729
Net fixed assets
73,229
78,050
Accounts payable
6,389
7,240
Inventory
20,764
22,062
Dividends
2,979
2,514
For 2019, calculate the cash flow from assets, cash flow
to creditors,...
Suppose the corporate tax rate is 35%, and investors pay a personal tax rate of 25%...
Suppose the corporate tax rate is 35%, and investors pay a
personal tax rate of 25% on income from dividends or capital gains
and a personal tax rate of 32.4% on interest income. Your firm
decides to add debt so it will pay an additional $30 million in
interest each year. It will pay this interest expense by cutting
its dividend.
a. How much will debt holders receive after paying taxes on the
interest they earn?
b. By how much...
Suppose the corporate tax rate is 40%, investors pay a tax rate of 20% on income...
Suppose the corporate tax rate is 40%, investors pay a tax rate
of 20% on income from dividends or capital gains and a tax rate of
30% on interest income.
Rally, Inc., currently an all-equity
firm, is considering adding permanentdebt through a levered
recapitalization (Rally plans to raise 300 million through debt and
payout the proceeds to shareholders). Interest Rally will be paying
each year is expected to be $15 million. Rally will pay this
interest expense by cutting its...
Suppose the corporate tax rate is 40%, investors pay a tax rate of 20% on income...
Suppose the corporate tax rate is 40%, investors pay a tax rate
of 20% on income from dividends or capital gains and a tax rate of
30% on interest income.
Rally, Inc., currently an all-equity firm, is considering adding
permanent debt through a levered recapitalization (Rally plans to
raise 300 million through debt and payout the proceeds to
shareholders). Interest Rally will be paying each year is expected
to be $15 million. Rally will pay this interest expense by cutting...
Suppose the corporate tax rate is 40%, investors pay a tax rate of 20% on income...
Suppose the corporate tax rate is 40%, investors pay a tax rate
of 20% on income from dividends or capital gains and a tax rate of
30% on interest income.
Rally, Inc., currently an all-equity
firm, is considering adding permanent debt through a levered
recapitalization (Rally plans to raise 300 million through debt and
payout the proceeds to shareholders). Interest Rally will be paying
each year is expected to be $15 million. Rally will pay this
interest expense by cutting...
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