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 the above.

Question

Quizplus · Accepted Answer

If a tax-free investment pays 6%, a taxable investment must earn more than 6% to provide an equivalent after-tax return. 
Let x be the pre-tax return on taxable bonds.
After-tax return on taxable bonds = pre-tax return on taxable bonds * (1 - corporate tax rate)
6% (tax-free return) = x * (1 - 0.30)
x = 8.57%
Therefore, the pre-tax return on taxable bonds is 8.57%. 
Option D, 8.57%, is the correct answer.

An Investment Is Available That Pays a Tax-Free 6