The Shrieves Corporation has $20,000 that it plans to invest in marketable secur

Question

The Shrieves Corporation has $20,000 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.

Explanation / Answer

Hi,

Please find the answer as follows:

A-T rate of return on AT&T bond = 10*(1-.35) = 6.5%

A-T rate of return on Florida muni bonds= 6% (since on tax is paid)

A-T Preferred Stock = 8.5*.70 + 8.5*.30*(1-.35) = 7.6075 or 7.61%

Thanks.

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