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Principles of Finance Class (Lovell Co. and State of Pennsylvania bond issuance)

Problem 1 - After Tax Returns (10 Points)

a. Lovell Co. purchased preferred stock in another company. The preferred stock's before tax yield was 8.4 percent. The tax rate on corporate income is 40 percent. What is the after tax return on the preferred stock?

b. A bond issued by the State of Pennsylvania provides a 9 % yield. What yield on a Synthetic Chemical bond would cause the two bonds to provide the same after tax rate of return to an investor in the 36 percent tax bracket?

Please see attachment for Problem 2

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a. Lovell Co. purchased preferred stock in another company. The preferred stock's before tax yield was 8.4 percent. The tax rate on corporate income is 40 percent. What is the after tax return on the preferred stock?

After Tax Return (%) = Pretax Return (%)(1 - Tax rate (%))
In this case Pretax Return = 8.4% and Tax rate=0.4
Therefore, after Tax Return on the preferred stock = 8.4*(1-0.4)=5.04 %

b. A bond issued by the State of Pennsylvania ...

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