Question

HEWLUMICCLCULUL Chapter 1 homework A Melinda invests $430,000 in a City of Heflin bond that pays 4.2 percent interest. Alternatively, Melinda could have invested the $430,000 in a bond recently issued by Surething Inc., that pays 6 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda's marginal tax rate is 30 percent. (Leave no cells blank T be sure to enter "0" wherever required. Round your after-tax rate of return to one decimal place.) Required: 25 points a. What is her after-tax rate of return for the City of Heflin bond? b. How much explicit tax does Melinda pay on the City of Heflin bond? c. How much implicit tax does she pay on the City of Heflin bond? d. How much explicit tax would she have paid on the Surething Inc bond? e. What is her after-tax rate of retum on the Surething Inc bond? eBook References a b. C. After-tax rate of return Explicit tax Implicit tax Explicit tax After-tax rate of return d

Answer 1

Answert a) After tax rate of return = pretax rate of selaim = 4.2% b) Melinda pays no explicit tax since the city of Heflin boud is tax exempt bond. .. Explicit tax ="3080" (ov) ço e) calculation of Implicit Tax Interest earned on city of Helliuboud $18,060 {$430,000 x 4.27 Interest paid by similar priced taxable bond $25,800 £$430,000 x67] Implieit Fax paid by Helinda ($ 25800-$18,0607_ $7,740 d) Explicit taxe = Interest paid by Surething. The boud = $25,800*30% = $ 7,740 :. Explicit Tax = $ 7,740 e) After tax income Surething. iue bond.:$85800-$7740 After tax rate of return =$18060*430.000 )x100 = $ 18060 :. After tax sale of relinci 4.2 arh 4.2 %