An investment is available that pays a tax-free 6%.Ignoring risk,what is the pre-tax return on taxable bonds? The corporate tax rate is 35%.
A)3.50%
B)6.00%
C)7.14%
D)9.23%
E)None of the above.

Question

Quizplus · Accepted Answer

Since the investment that pays a tax-free 6% is tax-free, we need to find the taxable bond that pays an equivalent pre-tax return after accounting for taxes.

Let's assume that the pre-tax return on taxable bonds is x%.

After paying 35% in corporate taxes, the after-tax return would be:

(1 - 0.35) * x% = 0.65x%

We want to find the x% that will give us an after-tax return of 6%. So:

0.65x% = 6%

x% = 6% / 0.65

x% = 9.23%

Therefore, the pre-tax return on taxable bonds would need to be 9.23% to achieve the same after-tax return as the tax-free investment that pays 6%.

So, the best choice is D) 9.23%.

An Investment Is Available That Pays a Tax-Free 6