The Nash Corp. is considering four investments. Which provides the highest after-tax return for Nash Corp. if it is in the 21% federal tax bracket? Assume the tax rate on dividends is 15%.

Question

Quizplus · Accepted Answer

After-tax return on Treasury bonds = 4% × (1 − 0.21) = 3.16%
After-tax return on corporate bonds = 7.5% × (1 − 0.21) = 5.93%
After-tax return on municipal bonds = 7.25%
After-tax preferred return = Before-tax preferred stock yield × [1 − (Tax rate) (Taxable amount of dividends)] = 0.075 × [1 − (0.15) (0.30)] = 7.16%