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After-tax nominal return

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The Stuart Corporation has excess cash to invest in one of two securities. The company's tax rate is 40 percent. The first alternative is a 10-year, 10 percent coupon bond (with semiannual interest payments) that has a current price of $1,000 and a yield of 10 percent. The second alternative is the preferred stock of Pickett Corp. which promises to pay a before-tax return of 9 percent(keep in mind the 70% exclusion for tax purposes). What is the after-tax nominal return of the better investment alternative?

a. 7.92%
b. 9.00%
c. 7.33%
d. 5.40%
e. 7.00%

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The solution explains how to determine the after-tax nominal return of the better alternative

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1. The bond has a current YTM of 10% since the price is the same as par value. Interest income is ...

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