An investment is available that pays a tax-free 7%.The corporate tax rate is 40%.Ignoring risk, what is the pre-tax return on taxable bonds?
A)4.20%
B)7.00%
C)7.47%
D)11.67%
E)None of the above

Question

Quizplus · Accepted Answer

To find the pre-tax return on taxable bonds that would be equivalent to a 7% tax-free return, you need to divide the tax-free return by (1 - tax rate). So, 7% / (1 - 0.40) = 11.67%.

An Investment Is Available That Pays a Tax-Free 7