Chapter 03: Financial Statements, Cash Flow and Taxes
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Tax rate 35.00%
Municipal yield = After-tax bond yield
4.25% = BT yield (1 – T)
110. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds
and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield
6.00%, and Carter’s marginal income tax rate is 25.00%, what yield on the Chicago municipal bonds would make Carter’s
treasurer indifferent between the two?
a. 3.56%
b. 3.69%
c. 4.50%
d. 5.45%
e. 4.55%
Chapter 03: Financial Statements, Cash Flow and Taxes
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b. -$731.25; $337.50
c. -$1,106.25; $253.13
d. -$956.25; $306.25
e. -$1,143.75; $234.38
Chapter 03: Financial Statements, Cash Flow and Taxes
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d. 60% in the project; 40% in FPL.
e. 50% in each.
116. Solarcell Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between AT&T
bonds that yield 11.50%, State of Florida municipal bonds that yield 11.00%, and AT&T preferred stock with a dividend
yield of 9.00%. Solarcell’s corporate tax rate is 25%, and 70.00% of the preferred stock dividends it receives are tax
exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax
returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.
a. 8.63%
b. 9.32%
c. 10.52%
d. 7.33%
e. 9.23%
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118. Mantle Corporation is considering two equally risky investments:
∙ A $5,000 investment in preferred stock that yields 7.15%.
∙ A $5,000 investment in a corporate bond that yields 10.00%.
What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a
50.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to
two decimal places.)
a. 39.48%
b. 43.47%
c. 42.58%
d. 44.36%
e. 33.27%
119. West Corporation has $50,000 that it plans to invest in marketable securities. The corporation is choosing between
the following three equally risky securities: Alachua County tax-free municipal bonds yielding 8.50%; Exxon Mobil
bonds yielding 10.50%; and GM preferred stock with a dividend yield of 9.80%. West’s corporate tax rate is 25.00%.
What is the after-tax return on the best investment alternative? Assume a 70.00% dividend exclusion for tax on dividends.
(Assume the company chooses on the basis of after-tax returns. Round your final answer to 3 decimal places.)
a. 7.252%
b. 8.159%
c. 7.705%
d. 8.575%
e. 8.249%
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123. In 2018, Bradshaw Beverages had taxable income of -$800,000. In 2019, its taxable income is $1,250,000. Its
corporate tax rate is 25%.
Assume that the company takes full advantage of the Tax Code’s carry-forward provision.. How much did the company
pay in taxes during 2019?
a. $392,400
b. $112,500
c. $120,000
d. $108,400
e. $234,000
124. In 2018, Uniontown Books had EBIT equal to -$1,200,000. In 2019, its EBIT was $1,800,000.
The company has no debt, and therefore, pays no interest expense. Its corporate tax rate is 25%. What was Uniontown’s
tax liability for 2019? (Assume that the company takes full advantage of the carry-forward provision.
a. $75,000
b. $950,000
c. $300,000
d. $150,000
e. $225,000