Arvo Corporation is trying to choose between three alternative investments. The three securities that the company...
Arvo Corporation is trying to choose between three alternative investments. The three securities that the company is considering are as follows: ∙ Tax-free municipal bonds with a return of 8.8%. ∙ Wooli Corporation bonds with a return of 11.75%. ∙ CFI Corp. preferred stock with a return of 9.8%. The company’s tax rate is 16.00%. What is the after-tax return on the best investment alternative? Assume a 70% dividend exclusion for tax on dividends. (Round your final answer to 3 decimal places.) a. 9.870% b. 10.956% c. 10.857% d. 10.660% e. 8.883%
Homework Answers
a.9.870%.
| after tax return on tax free municipal bonds | 8.80% |
| after tax return on wooli corporation bonds (11.75% * (1-0.16)) | 9.87% |
| after tax return on preferred stock (9.8% - (9.8% *(1-0.7)*(0.16))=> 9.8% - 0.4704% | 9.33% |
after tax return on wooli corporation bonds will have the highest after tax return of 9.87%.
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