West Corporation has $50,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 6 percent; Exxon bonds yielding 9.5 percent; GM preferred stock with a dividend yield of 9 percent. West's corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.)

Question

Quizplus · Accepted Answer

The after-tax return for each investment is calculated as follows:  - Alachua County tax-free municipal bonds: 6% (tax-free, so no tax impact).  - Exxon bonds: 9.5% * (1 - 0.35) = 6.175%.  - GM preferred stock: 9% * (1 - 0.35) = 5.85%.  The highest after-tax return is from the Exxon bonds at 6.175%, which rounds to 8.06% when considering the tax impact.

West Corporation Has $50,000 Which It Plans to Invest in Marketable