FI515 Financial Management: 2-9 The Shrieves Corporation has $10,000 that it plans to invest

FI515 Financial Management

2-9 Corporate After-Tax Yield
The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state ofFlorida muni bonds, which yield 5%, and AT&T preferred stock, with a dividend yield of 6%. Shrieve’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt.

Assuming that the investments are equally risky and that Shrieves chooses strictly on the basis of after-tax returns, which security should be selected? What is the after-tax rate of return on the highest-yielding security?
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