A. A listed call option contract for IBM with an exercise price of $148 has a pr
ID: 2616528 • Letter: A
Question
A. A listed call option contract for IBM with an exercise price of $148 has a price quote of $7.20. If you buy this option and hold it to expiration, the contract will generate a positive profit for you if the stock's price is ____________ at expiration.
B.
A municipal bond carries a coupon rate of 8.00% and is trading at par.
What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket?
C.Find the after-tax return to a corporation that buys a share of preferred stock at $43, sells it at year-end at $43, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (Round your answer to 2 decimal places.)
Explanation / Answer
A)
Is above the exercise price
B)
Equivalent tax yield = 0.08 / ( 1 - 0.35)
Equivalent tax yield = 0.1231 or 12.31%
C)
Tax on dividend = 4 * 0.3 = 1.2
After tax income = 4 - 1.2 = 2.8
After tax return = 2.8 / 43
After tax return = 0.06512 or 6.51%
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