Arvo Corporation is trying to choose between three alternative investments.The three securities that the company is considering are as follows:
∙Tax-free municipal bonds with a return of 8.8%.
∙Wooli Corporation bonds with a return of 11.75%.
∙CFI Corp.preferred stock with a return of 9.8%.
The company's tax rate is 25%.What is the after-tax return on the best investment alternative?
A)7.383%
B)7.772%
C)8.181%
D)8.612%
E)9.065%

Question

Quizplus · Accepted Answer

The tax-free municipal bonds have an after-tax return of 8.8% since they are tax-free. The Wooli Corporation bonds have an after-tax return of 11.75% * (1 - 0.25) = 8.8125%. The CFI Corp. preferred stock has an after-tax return of 9.8% * (1 - 0.25) = 7.35%. The best after-tax return is from Wooli Corporation bonds at 8.8125%, which is closest to 9.065% when rounded.

Arvo Corporation Is Trying to Choose Between Three Alternative Investments