A corporation can earn 7.50% if it invests in municipal bonds. The corporation can also earn...
A corporation can earn 7.50% if it invests in municipal bonds. The corporation can also earn 8.00% (before-tax) by investing in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate tax rate that makes the corporation indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.)
Group of answer choices
17.29%
26.04%
17.08%
20.83%
21.88%
Homework Answers
| Assume tax rate is X | ||||||
| municipal bonds is tax free | ||||||
| and 70% dividend is tax free | ||||||
| hence equation would be as follows for indifference tax rate | ||||||
| 7.5 = (8*70%) + [8*30%*(1-X)] | ||||||
| 7.5 =5.6+2.4-2.4X | ||||||
| 7.5 =8-2.4X | ||||||
| 2.4X =8-7.5 | ||||||
| 2.4X =0.50 | ||||||
| X =0.20833 | ||||||
| X =20.833% | ||||||
| Therefore the correct option is FOURTH | ||||||
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