The Shrieves Corporation has $10,000 that it plans to invest in marketable secur

Question

The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 10%, state of Florida muni bonds, which yield 6% (but are not taxable), and AT&T preferred stock, with a dividend yield of 8.5%. 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.

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

Explanation / Answer

After tax return:

On AT&T bonds: 6.5% [10%×(1-35%)]

Florida muni bonds: 6%

AT&T preferred stock: 6.84% [8.5%-8.5%×30%×(1-35%)]

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