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After Tax Yield and Tax Liability

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1. An investor recently purchased a corporate bond which yields 9 percent. The investor is in the 36 percent combined federal and state tax bracket. What is the bond's after-tax yield?

2. Corporate bond issued by Johnson Corporation currently yield 8 percent. Municipal bonds of equal risk currently yield 6 percent. At what tax rate would an investor be indifferent between these two bonds?

3. The Talley Corporation had a taxable income of $365,000 for operations after all operating cost but before
(1) interest charges of $50,000,
(2) dividends received of $15,000,
(3) dividend paid of $25,000, and
(4) income taxes. What is the firm's income tax liability and its after-tax income?
What are the company's marginal and average tax rates on taxable income?

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Solution Preview

Personal After-Tax Yield
1. An investor recently purchased a corporate bond which yields 9 percent. The investor is in the 36 percent combined federal and state tax bracket. What is the bond's after-tax yield?

The bonds after tax yield is given as Pre tax yield X (1-tax rate)
After Tax Yield = 9% X (1-0.36) = 9%X0.64=5.76%

Personal After-Tax Yield
2. Corporate bond issued by Johnson Corporation currently yield 8 percent. Municipal bonds of equal risk currently yield 6 percent. At what tax rate ...

Solution Summary

The solution explains how to calculate the after tax yield and tax liability with all calculations clearly displayed.

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