Question

Corporate After-Tax Yield The Shrieves Corporation has $15,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 9.5%, state of Florida muni bonds, which yield 4.5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 8%. Shrieves' corporate tax rate is 40%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Round your answers to two decimal places. After-tax rate of return on AT&T bond: % After-tax rate of return on Florida muni bonds: After-tax rate of return on AT&T preferred stock:

Answer 1

AT&T Bond

After tax rate of return = 9.5% * (1 - T) = 9.5% * (1 - 0.40) = 9.5% * 0.60 = 5.70%

State Florida Muni Bonds

After tax rate of return = 4.5% * (1 - T) = 4.5% * (1 - 0) = 4.5% * 1 = 4.50%

AT&T preferred stock

After tax rate of return = 8% - [8% * (1 - Exemption Limit) * T]

= 8% - [8% * (1 - 0.70) * 0.40]

= 8% - 0.96%

= 7.04%