Hi, I need help with my Managerial Finance assignment please... 5.The Omega Corp

Question

Hi, I need help with my Managerial Finance assignment please... 5.The Omega Corporation has some excess cash that it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 7 percent yield; (b) corporate bonds at a 13 percent yield; or (c) preferred stock at an 9 percent yield. Omega Corporation is in a 40 percent tax bracket and the tax rate on dividends is 10 percent. a-1. Compute the after-tax yields for the three investment options. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Aftertax yields a. Treasury bonds b Corporate bonds c. Preferred stock

Explanation / Answer

a) Treasury bonds :

After tax return = Interest rate(1-tax rate)

=7%(1-0.4)

=7%(0.6)

=4.2%

b) Corporate bonds

After tax return = Interest rate(1-tax rate)

=13%(0.6)

=7.8%

c) Preferred stock

70% of dividend are excluded from corporate tax leaving only 30% as taxable. Tax rate = 10%

=9%-(9%*30%)(0.1)

=9%-0.27%

=8.73%

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