Your investors require a 15% after-tax return, and your firm pays taxes at the marginal rate of 34%. Which of the following scenarios will provide them with the 15% after-tax return they
Require?

Question

Quizplus · Accepted Answer

For a 15% after-tax return on a $500,000 investment, investors require a return of $500,000 * 1.15 = $575,000 after taxes. In scenario A, the pre-tax return is $613,650 - $500,000 = $113,650. After paying 34% tax, the profit is $113,650 * (1 - 0.34) = $75,009, which when added to the original investment gives $575,009, meeting the after-tax return requirement. Scenarios B and C do not meet the after-tax return requirement when calculated similarly.

Your Investors Require a 15% After-Tax Return, and Your Firm