Explore BrainMass

Explore BrainMass

    After-tax rate of return on the highest yielding security

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    3-5
    The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T Bonds, which yield 7.5%, state of Florida muni bonds, which yield 5%, and AT & T preferred stock , with a dividend yield of 6%. Shrieves' corporate tax is rate is 35%, and 70% of the dividends received are tax exempt.

    Assuming that the investments are equally risky and that Shrieves chooses strictly on the basis of after-tax returns, which security should be selected? What is the after-tax rate of return on the highest yielding security?

    3-7

    The Menendez Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 Million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Mendndez's federal-plus-state tax rate is 40%

    a: set up an income statement. What is Menendez's expected net cash flow?
    b: Suppose congress changed the tax laws so that Menendez's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
    c: Now suppose that Congress instead of doubling Menendez's depreciation, reduced it by 50%. How would profit and net cash flow be affected?
    d: If this were your company would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

    © BrainMass Inc. brainmass.com March 4, 2021, 7:54 pm ad1c9bdddf
    https://brainmass.com/business/finance/after-tax-rate-of-return-on-the-highest-yielding-security-131127

    Solution Preview

    INVESTMENT RATE OF RETURN POST TAX RETURN

    Bonds 7.50% 4.88%

    Municipal Bonds 5% 5%

    Preferred Stock 6% 5.37%

    The preferred stock should be selected as its return is 5.37% (which is highest)
    a: set up an income statement. What is Menendez's expected net cash flow?
    in $mn
    Sales 12000000
    Less costs 9000000
    Profit before depreciation 3000000
    Less ...

    Solution Summary

    This provides the steps to calculate the after-tax rate of return on the highest yielding security

    $2.49

    ADVERTISEMENT