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    Computing After-tax Returns

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    Mr. Smith is in the 30% tax bracket. He earns $50,000 per year.

    What is his tax bracket after-tax income? 50000 x 0.60 = (1-0.40 = 0.60)

    50000 x 0.60 = 30000.00

    Mr. Smith has two investment opportunities:

    a. Megacorp, a for-profit healthcare company offering a bond at 8%
    b. Good Neighborcare, a not for profit healthcare compay offer a tax exempt bond at 5%.

    Which investment will yielf the greatest after tax financial return?

    0.08 x $100 = $8

    $8 x (1 - 40

    What is the rate for Good Neighborcare bond that would give Mr. Smith the same after tax return as Megacorp bond?

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    Solution Preview

    Mr. Smith is in the 30% tax bracket. He earns $50,000 per year.

    What is his tax bracket after-tax income?

    The $50,000 is subject to income tax, so he will pay 30 percent of the $50,000 in income taxes and keep the rest.

    After-tax income=before-tax income*(1-tax rate)
    After-tax income=$50,000*(1-.30)
    After-tax income=$50,000*.70
    After-tax income=$35,000

    Mr. Smith has two investment opportunities:

    a. Megacorp, a for-profit healthcare company ...

    Solution Summary

    Given a person's gross income, this solution illustrates how to compute his after-tax income. Then, given a taxable bond and tax-free bond, the solution illustrates how to compute the after-tax returns of both.

    $2.19

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