A firm in the 20 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of
A)8.75 percent.
B)10.8 percent.
C)20.0 percent.
D)None of these are correct.

Question

Quizplus · Accepted Answer

The correct answer is A because the firm must earn a before-tax yield of 8.75 percent to match the after-tax yield of 7 percent on the tax-exempt security.

A Firm in the 20 Percent Tax Bracket Is Aware