An investment is available that pays a tax-free 6%. The corporate tax rate is 30%. Ignoring risk,what is the pre-tax return on taxable bonds?
A) 4.20%
B) 6.00%
C) 7.67%
D) 8.57%
E) None of these.

Question

Quizplus · Accepted Answer

To find the pre-tax return on taxable bonds, we need to adjust the tax-free return of 6% for the impact of corporate taxes. Since the corporate tax rate is 30%, we can calculate the pre-tax return on taxable bonds as:
pre-tax return = tax-free return / (1 - tax rate)
pre-tax return = 6% / (1 - 0.30)
pre-tax return = 6% / 0.70
pre-tax return = 8.57%
Therefore, the answer is D) 8.57%.

An Investment Is Available That Pays a Tax-Free 6