Solarcell Corporation has $20,000 that it plans to invest in marketable securities.It is choosing between AT&T bonds that yield 11.50%,State of Florida municipal bonds that yield 11.00%,and AT&T preferred stock with a dividend yield of 9.00%.Solarcell's corporate tax rate is 25%,and 70.00% of the preferred stock dividends it receives are tax exempt.Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns,which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.

Question

Quizplus · Accepted Answer

The after-tax rate of return on the AT&T bonds is 8.63%. This is calculated as follows:After-tax rate of return = Yield * (1 - Tax rate)= 11.50% * (1 - 0.25)= 8.63%

Solarcell Corporation Has $20,000 That It Plans to Invest in Marketable