2-Assume that Juanita is indifferent between investing in a corporate bond that

Question

2-Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 7.2% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanita's marginal tax rate? (Do not round intermediate computations.)

19.76%

29.88%

40.00%

9.88%

None of these.

3-Jasmine started a new business in the current year. She incurred $28,000 of start-up costs. How much of the start-up costs can be immediately expensed (excluding amounts amortized over 180 months) for the year?

$0

$5,000

$28,000

$2,500

None of these

4-

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 7.6% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

20.00%

10.60%

9.60%

9.50%.

6.60%

Explanation / Answer

Question 2) Answer 40%

After tax yield of dividend paying stock is 7.2 % X (1 - 0.15) = 6.12%

The after tax yield of corporate bond must be = 6.12 % .

(Because Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 7.2% dividend yield)

Therefore ,

6.12% = 10.2% ( 1 - Marginal Tax Rate)

Marginal Tax Rate = 0.40 or 40 %

Question 3) Answer $5000

$5,000 of start-up expenses can be immediately expensed.

Question 4) Answer 9.5 %

The Interest Rate have to offer

7.6% / ( 1 - 0.20) = 9.5 %

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