Personal After-Tax Yield Corporate bonds issued by Johnson Corporation currently

Question

Personal After-Tax Yield

Corporate bonds issued by Johnson Corporation currently yield 10.5%. Municipal bonds of equal risk currently yield 5.5%. At what tax rate would an investor be indifferent between these two bonds? Round your answer to two decimal places.

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Corporate After-Tax Yield

The Shrieves Corporation has $25,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 9.75%, state of Florida muni bonds, which yield 6% (but are not taxable), and AT&T preferred stock, with a dividend yield of 8.25%. Shrieves' 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.

After-tax rate of return on AT&T bond: %
After-tax rate of return on Florida muni bonds: %
After-tax rate of return on AT&T preferred stock: %

Explanation / Answer

Personal Tax Yield :

Tax Rate = 47.62%

Muncipal Bonds Exempt from Tax so return after tax equals to 5.5%

for Corporate Bonds Before Tax Return = 10.5% , After Tax we require return same as municipal bonds i.e. 5.5%

Suppose i invest 100 Now, i will get after tax 5.5 abd before tax 10.5 so, my Tax amount equals to 5

5.5=10.5-5 whereas, 5 is total tax Paid to convert to %

5/10.5*100 = 47.62%

Corporate Tax Yield

After-tax rate of return on AT&T bond: 3.41%

After-tax rate of return on Florida muni bonds: 6.00%
After-tax rate of return on AT&T preferred stock: 7.38%

For Calculating After Tax Rate of Return

Return on Investment - Tax % apply on ROI = After Tax Return

AT & T bonds : 9.75 - 3.41(35% on 9.75) = 6.34%

State of Florida muni bonds :; 6% ( After Tax as well 6% as the same is tax free)

AT&T preferred stock : 8.25 - 0.87 ( Tax Rate 10.5% (of 35 % Tax 70 % is Exempt, so 35*70%=10.5%) = 7.38%

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