The Shrieves Corporation has $15,000 that it plans to invest in marketable secur

Question

The Shrieves Corporation has $15,000 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 4.5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves's corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Round your answers to two decimal places.

A-T rate of return on AT&T bond %
A-T rate of return on Florida muni bonds %
A-T rate of return on AT&T preferred stock %

Explanation / Answer

1. A T & T Bonds yields 7.5% hence, 15,000*7.5/100= $1125 taxes on it Taxes 1125*35/100 = $393.75 so, (1125 -393.75) = $731.25 731.25/15,000 =4.875% 2. Florida Bonds 15,000*5/100 = $750.00 Since no taxes deducted $750.00/$15,000 = 5.00% Yield 3.A T & T Stock yields 6% hence,we have 15,000*6/100= $900 70% tax exemption hence, $900*70/100 = $630 taxable, 900 - 630 = 270 also 35% Taxes so, $270*.35 = $94.5 in taxes Income (900-94.5)= $805.5 805.5/15,000 = 5.37% Yield

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