West Corporation has $50,000 that it plans to invest in marketable securities.The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 8.50%;Exxon Mobil bonds yielding 10.50%;and GM preferred stock with a dividend yield of 9.80%.West's corporate tax rate is 25.00%.What is the after-tax return on the best investment alternative? Assume a 70.00% dividend exclusion for tax on dividends.(Assume the company chooses on the basis of after-tax returns.Round your final answer to 3 decimal places. )

Question

Quizplus · Accepted Answer

The best investment alternative is the Alachua County tax-free municipal bonds yielding 8.50%. Since the interest from these bonds is tax-free, the after-tax return is the same as the stated yield, which is 8.50% or 8.500% when rounded to three decimal places. The other options would yield lower after-tax returns once adjusted for taxes and the dividend exclusion.

West Corporation Has $50,000 That It Plans to Invest in Marketable