af/servdet/quizictx-robert2-0039&quiz; action-takeQuizquiz probGuid-ONAPCOA80101

Question

af/servdet/quizictx-robert2-0039&quiz; action-takeQuizquiz probGuid-ONAPCOA8010100000041cdaa100 00008ck-m From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt Debt financing Equity financing You bought 1,000 shares of Tund Corp. stock for $90.03 per share and sold it for $60.59 per share within the same year. How will your gain or loss be treated when you file your taxes? O As a capital loss deducted from current taxable income As a capital gain taxed at the current ordinary-income tax rate O As a capital loss taxed at the long-term tax rate O As a capital loss deducted from taxable income in the year that the loss is realized Suppose you want to invest $10,000. You have two options: (1) Invest in Califomia municipal bonds with an expected rate of return of 9.00%, or (2) invest in J and K Corp.'s bonds with an expected rate of return of 16.65%. Assume that your decision is based on a tax perspective. If everything else is the same for both bonds, at what tax rate would you be indifferent between these two bonds? 39.06% 45.95% ? 41.36% o 57,44% According to a tax law established in 1969, taxpayers must pay the or regular tax higher of the Alternative Minimum Tax (AMT) The applicable tax rate tor s corporations is based on the Corporate tax rate Stackholders individual tax rates

Explanation / Answer

Only one question is left blank, third question.

if after tax return of J and K corp bond equals muncipal bond, then there will be indifference, as muncipal bonds are tax exempt.

Equation follows like this

Return on muncipal bonds = return on taxable bonds (1-tax rate)

after substituting available values

9% = 16.65% * (1-T)

1-T = 9%/16.65% = 0.5405

T = 1-0.5405 = 0.4595

Tax rate = 45.95%

at a tax rate of 45.95%, investor will be indifferent between two options.

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