4. Curtis invests $400,000 in a city of Athens bond that pays 6.00% interest. Al
ID: 2591032 • Letter: 4
Question
4. Curtis invests $400,000 in a city of Athens bond that pays 6.00% interest. Alternatively, Curtis could have invested the $400,000 in a bond recently issued by Initech, Inc. that pays 6.75% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%.
How much implicit tax would Curtis pay on the city of Athens bond?
Multiple Choice
$24,000.00
$840.00
$740.00
$3,000.00
None of the choices are correct.
11. If Joel earns a 7% after-tax rate of return, $27,000 received in two years is worth how much today? Use Exhibit 3.1. (Round present and future value factor(s) to 3 decimal places.)
Multiple Choice
$27,000.
$25,200.
$23,571.
$28,890.
None of the choices are correct.
Explanation / Answer
4.
Implicit tax
= Pre-tax income from investment in Initech bond - Pre-tax incpme from investment in Athens bond
= ($400,000 x 6.75%) - ($400,000 x 6%)
= $3,000
The correct answer is $3,000
11.
Calculate the present value of $27,000 at 7% discount rate and a period of 2 years to get the present worth of this amount.
Present worth = $27,000 x PVIF (7%, 2) = $27,000 x 0.873 = $23,571
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