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In: Business and Management

Submitted By NikkiM582
Words 771
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(2-1) An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?
Corporate yield = 9%; T = 35.5% AT yield = 9%(1 - T) = 9%(0.645) = 5.76%
(2-2) Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?

Corporate bond yields 8%. Municipal bond yields 6%
Equivalent pretax yield on taxable bond=Yield on muni=8%=6% (1-T) (1-T)
0.08-0.08T=0.06
-0.08T=-0.02
T=25%
(2-7) The Talley Corporation had a taxable income of $365,000 from operations after all operating costs, but before (1) interest charges of $50,000 (2) dividends received of $15,000 (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s income taxes liability and its after-tax income? What are the company's marginal and average tax rates on taxable income?
Income after operating costs:
$365,000.00
Less: Interest Expense
-$50,000.00
Plus: Taxable Dividends Received
$4,500.00
Only 30% of the $15,000 in dividends is taxable.
Taxable Income:
$319,500.00
Corporate Tax Rates as of January 2008, $319,500 falls into the $100,000 to $335,000 bracket so the corporate tax would be: $22,250 + .39 ($319,500 - $100,000)
Base Amount plus marginal rate x difference between taxable income - lower base
Tax Liability =
$107,855.00
Talley's marginal tax rate is 39% the rate on the last dollar of income subject to tax.
Talley's average tax rate is: Tax Liability / Amount of Income Subject to Tax
Average Tax Rate = $107,855/$319,500 =33.76%
2-9) The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5%…...

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