Question 1

Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 7.8 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Accepted Answer

To find the interest rate that the municipal bond would have to offer, we need to set the after-tax return on the corporate bond equal to the after-tax return on the municipal bond. 
After-tax return on Corporate bond = 7.8% * (1-0.24) = 5.93%
Let x be the interest rate on the municipal bond. 
After-tax return on Municipal bond = x * (1-0) = x%
Setting the two after-tax returns equal to each other: 
5.93% = x%
Therefore, the interest rate on the municipal bond would have to be 5.93% for Larry to be indifferent between the two bonds.

Question 2

Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 10 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Accepted Answer

Municipal bonds are often tax-exempt. To find the equivalent interest rate for Larry, calculate: 10% * (1 - 0.24) = 7.6%.

Question 3

Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

The after-tax return on the dividend-paying stock is calculated as follows: 
8% x (1 - 0.15) = 6.8%
The after-tax return on the municipal bond (assuming it is tax-exempt) must also be 6.8% for Lucas to be indifferent between the two investments. Therefore, the bond must offer an interest rate of:

6.8% / (1 - 0.32) = 10.00%

However, as municipal bond interest is often tax-exempt, the answer is likely to be lower than 10%. The closest option is D) 6.80 percent.

Question 4

Assume that Will's marginal tax rate is 20 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays a dividend yield of 8.6 percent, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

The answer of Assume that Will's marginal tax rate is...

Question 5

Assume that Lucas's marginal tax rate is 12 percent and his tax rate on dividends is 6 percent. If a dividend-paying stock (with no growth potential)pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

Lucas's after-tax rate of return on the dividend-paying stock would be:
0.08(1-0.06) = 0.0752 or 7.52%
Therefore, to be indifferent between the stock and a municipal bond, the rate of return on the bond would have to be 7.52%. Since Lucas's marginal tax rate is 12%, he would pay more in taxes on the interest income from the bond than on the dividend income from the stock. So, the bond would have to offer a higher pre-tax rate of return than the stock's dividend yield. Hence, the answer is 7.52 percent.

Question 6

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a city of Atlanta bond pays 7.65 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

To be indifferent, the after-tax yield on the stock must equal the tax-free yield on the bond. The after-tax yield on the stock is the dividend yield times (1 - tax rate on dividends). So, 7.65% = Dividend Yield * (1 - 0.15). Solving for Dividend Yield gives 9.00%.

Question 7

Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 10.4 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate? (Do not round intermediate computations.)

Accepted Answer

Since Jose is indifferent between investing in a bond that pays 10% interest and a stock with no growth potential that pays 10.4% dividend yield, it means that his after-tax return on the stock must be equal to the return on the bond.

Let's calculate his after-tax return on the stock: 
Dividend yield = 10.4%
Tax rate on dividends = 15%
After-tax dividend yield = (1 - tax rate) * dividend yield = (1 - 0.15) * 10.4% = 8.84%

Now we can set up an equation: 
10.4% (pre-tax dividend yield) * (1 - 15%) (tax rate) = 10% (bond interest yield)

Simplifying this equation, we get: 
0.104 * 0.85 = 0.10

This implies that his marginal tax rate is 11.60% [(0.104-0.10)/0.104*100%].

Therefore, the best choice is C.

Question 8

Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Accepted Answer

To find the equivalent taxable interest rate that would make Lavonia indifferent between a tax-exempt bond (like a municipal bond from the city of Tampa) and a taxable bond (like a corporate bond), we use the formula: Taxable Interest Rate = Tax-Exempt Interest Rate / (1 - Marginal Tax Rate). Plugging in Lavonia's details: 5% / (1 - 0.22) = 5% / 0.78 ≈ 6.41%. Since none of the provided options matches this calculation, the correct answer is E) None of the choices are correct.

Question 9

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 3.25 percent interest and a corporate bond that pays 4.75 percent interest. What is Marsha's marginal tax rate? (Do not round intermediate computations.)

Accepted Answer

Marsha's marginal tax rate can be calculated using the formula: Tax Rate = 1 - (Municipal Bond Rate / Corporate Bond Rate). Substituting the given rates: 1 - (3.25 / 4.75) = 1 - 0.6842 = 0.3158 or 31.58 percent.

Question 10

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 10.20 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

Shavonne's after-tax return on the corporate bond would be (1-0.37) x 10.20% = 6.43%. Therefore, the dividend yield on the stock would have to be 6.43% in order for her to be indifferent between the two investments. However, since the tax rate on dividends is only 15%, the stock would only need to offer a dividend yield of 6.43% / (1-0.15) = 7.56% for Shavonne to be indifferent. Therefore, the best choice is B.

Question 11

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

Accepted Answer

Juanita is indifferent between a 10.20% interest from a bond and a 6% dividend yield after tax. The after-tax yield on the dividend is 6% because dividends are taxed at 15%, meaning she keeps 85% of the dividend yield. To find the equivalent pre-tax yield on the dividend that matches the bond's interest rate, we set up the equation: 0.85 * Pre-tax yield = 6%. Solving for the pre-tax yield gives us 7.0588%. This means that if Juanita were taxed at her marginal rate on a 7.0588% yield, she would receive the same after-tax income as from the 6% dividend yield. Since the bond pays 10.20% and is equivalent in after-tax terms to a 7.0588% yield, her marginal tax rate must be such that 10.20% after tax is equivalent to a 7.0588% yield. The marginal tax rate that equates these two yields is 50%, as it reduces the 10.20% to 7.0588% after tax.

Question 12

Assume that Will's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays a dividend yield of 8 percent, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

To be indifferent, the after-tax yield from the bond must equal the after-tax yield from the dividend. The after-tax dividend yield is 8% * (1 - 0.15) = 6.8%. The bond's after-tax yield is the interest rate * (1 - 0.32). Solving for the interest rate gives 10%.

Question 13

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5 percent interest and a corporate bond that pays 6.25 percent interest. What is Javier's marginal tax rate?

Accepted Answer

The answer of Assume that Javier is indifferent between investing...

Question 14

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6 percent interest and a corporate bond that pays 8 percent interest. What is Marsha's marginal tax rate?

Accepted Answer

The answer of Assume that Marsha is indifferent between investing...

Question 15

Assume that Juanita is indifferent between investing in a corporate bond that pays 8.20 percent interest and a stock with no growth potential that pays a 6.20 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?(Do not round intermediate computations.)

Accepted Answer

Juanita is indifferent between earning 8.20% from a bond (which is fully taxed) and earning 6.20% from a dividend (which is taxed at 15%). To find her marginal tax rate, we need to adjust the dividend yield to its after-tax equivalent and set it equal to the bond yield. The after-tax yield of the dividend is 6.20% * (1 - 0.15) = 5.27%. To make 5.27% equivalent to 8.20%, we solve for the tax rate (t) in the equation 8.20% * (1 - t) = 5.27%. Solving for t gives us a marginal tax rate of approximately 35.73%.

Question 16

Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 5.4 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Accepted Answer

To make Lavonia indifferent between the two bonds, the after-tax yield of the corporate bond must equal the yield of the tax-exempt city bond. The formula to calculate the equivalent taxable interest rate is: Tax-Exempt Interest Rate / (1 - Marginal Tax Rate). Plugging in the numbers: 5.4% / (1 - 0.22) = 5.4% / 0.78 = 6.923%, which rounds to 6.92%.

Question 17

Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?

Accepted Answer

The correct answer is C because the marginal tax rate is the rate at which the last dollar of income is taxed. In this case, Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. This means that the after-tax return on the stock is 8 percent * (1 - 15%) = 6.8 percent. The after-tax return on the bond is 10 percent * (1 - 32%) = 6.8 percent. Therefore, Jose's marginal tax rate is 32%.

Question 18

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a city of Atlanta bond pays 6.8 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

To find the dividend yield a stock would have to offer for Keisha to be indifferent between investing in a city of Atlanta bond and the stock, we need to set up an equation where the after-tax cash flow from both investments are equal:

After-tax cash flow from city of Atlanta bond = After-tax cash flow from dividend-paying stock
0.068 x (1 - 0.37) = Dividend yield x (1 - 0.15)

Simplifying the equation, we get:

0.0428 = 0.85 x Dividend yield
Dividend yield = 0.0428/0.85 = 0.05

Therefore, the dividend yield a dividend-paying stock would have to offer for Keisha to be indifferent between the two investments is 5%, or 8% before taxes (since her tax rate on dividends is 15%). The closest answer choice is C) 8.00 percent.

Question 19

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 6.2 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

To be indifferent, the after-tax yield from both investments should be equal. The after-tax yield from the bond is 6.2% * (1 - 0.37) = 3.906%. For the stock, the after-tax yield is the dividend yield * (1 - 0.15). Setting these equal gives: dividend yield * 0.85 = 3.906%, so dividend yield = 3.906% / 0.85 = 4.6%.

Question 20

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 3 percent interest and a corporate bond that pays 4.3 percent interest. What is Javier's marginal tax rate?

Accepted Answer