1 answer

35. Emily is in the 35% marginal tax bracket. She can purchase a York County school...

Question:

35. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest, which is not
35. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest, which is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct: a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she had purchased the York County school bond. b. If she buys a U.S. government bond paying 5 % , her after-tax rate of return will be less than if she had purchased the York County school bond. c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she had purchased the York County school bond. d. All of these are correct. e. None of these is correct.

Answers

please find below the solution.. let me know if you need any clarification..

correct answer is option : b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.

exp : interest on US government bond will be tax exempt therefore firm will receive 5% interest which is higher compared to 3.5% before tax. Correct answer is option b.

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