$519.68 $296.89 Save Question 17 (1 point) A corporation can earn 75% if it inve

Question

$519.68 $296.89 Save Question 17 (1 point) A corporation can earn 75% if it invests in municipal bonds The corporation can also earn 8.40% (before-tax) by nvesting in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate ate that makes the corporation indifferent between the two investments? Assume a 70% dividend exclus for tax ividends. (Do not round your intermediate answer and round vour final answer to two decimal places 28 57% 32.50% 35.71% 27.50% 43.93% Save RE IS

Explanation / Answer

Option C is correct.

Corprate tax rate = 35.71 %

Taxable return on stock = 8.4 * 30 %

= 2.52 %

Tax on return = 2.52 * 35.71 %

= 0.9 %

Net of tax return on stock = 7.5 %

Return on Bond = 7.5 %

Note - Return on bond is assumed as post tax rate.

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