West Corporation has $50,000 that 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 8.50%;Exxon Mobil bonds yielding 10.50%;and GM preferred stock with a dividend yield of 9.25%.West's corporate tax rate is 32.00%.What is the after-tax return on the best investment alternative? Assume a 70.00% dividend exclusion for tax on dividends.(Assume the company chooses on the basis of after-tax returns.Round your final answer to 3 decimal places. )

Question

Quizplus · Accepted Answer

11ee3121_87fe_ac04_9616_67b1f2771903_TB1222_11
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Since municipal bonds are exempt from federal taxes,
its BT return = AT return
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AT municipal bond yield = 8.500%
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AT bond yield = BT bond yield 11ea856c_8c03_25cd_9aec_8f8ca5c124bd_TB1222_11 (1 - T)
AT bond yield = 7.140%
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AT preferred yield = BT pref.return [1 - (1 - Div exclusion%)(T)]
AT preferred yield = 8.362%
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Highest AT yield = 8.500%

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