An investment is available that pays a tax-free 5%.Ignoring risk,what is the pre-tax return on taxable bonds? The corporate tax rate is 30%.
A)4.20%
B)6.00%
C)7.14%
D)8.57%
E)None of the above.

Question

Quizplus · Accepted Answer

The pre-tax return on taxable bonds is 7.14%. This is because the after-tax return on the tax-free investment is 5%, and the corporate tax rate is 30%. Therefore, the pre-tax return on the taxable bonds must be 7.14% in order to provide the same after-tax return as the tax-free investment.

An Investment Is Available That Pays a Tax-Free 5