Weston Corporation has some money to invest,and its treasurer is choosing between General Motors bonds and State of Illinois bonds.Both have the same maturity,and they are equally risky and liquid.If the Illinois bonds,which are tax-exempt,yield 6 percent,and Weston's marginal income tax rate is 40 percent,what yield on GM bonds would make Weston's treasurer indifferent between the two?

Question

Quizplus · Accepted Answer

To make Weston's treasurer indifferent between the two bonds, the after-tax yield of the GM bonds must equal the yield of the tax-exempt Illinois bonds. The formula to calculate the equivalent taxable yield is: Tax-Exempt Yield / (1 - Tax Rate). Plugging in the numbers: 6% / (1 - 0.40) = 6% / 0.60 = 10%. Therefore, a 10% yield on the GM bonds would make the treasurer indifferent between the two options.

Weston Corporation Has Some Money to Invest,and Its Treasurer Is