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Effective annual rate Answer: b Diff: E 24. Which of the following bank accounts has the highest effective annual return? a. An account which pays 10 percent nominal interest with monthly com- pounding. b. An account which pays 10 percent nominal interest with daily com- pounding. c. An account which pays 10 percent nominal interest with annual com- pounding. d. An account which pays 9 percent nominal interest with daily com- pounding. e. All of the investments above have the same effective annual return.

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1. (TCO C) On its 1999 balance sheet, Sherman Books showed a balance of retained earnings equal to \$510 million. On its 2000 balance sheet, the balance of retained earnings was also equal to \$510 million. Which of the following statements is most correct? Show your calculations. a. The company must have had net income equal to zero in 2000. b. The company had a profit in 2000 but did not pay a dividend in 2000. c. the company’s net income in 2000 was \$200 million. d. If the company lost money in 2000, they must have paid a dividend. e. None of the statements above is correct. 2. (TCO D) After-tax returns The XYZ Corporation has \$1000,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Greenville County tax-free municipal bonds yielding 7 percent; AB corp. bonds yielding 11.5 percent; XZ corp. preferred stock with a dividend yield of 10 percent. XYZ's corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.) (Points: 20) Tax-free municipal bonds with a return of 7%. · AB bonds with a return of 11.5%. · XZ Corp. preferred stock with a return of 10%. . The company’s tax rate is 35%. PT Return Amount Taxable Rate Muni Bond 7.00% 0% 35% AB Corp Bond 11.50% 100% 35% XZ P. Stock (Div) 10.00% 30% 35% AT Return - Muni Bond = 7% - (7%*0%*35%) = 7% - AB Corp Bond = 11.5% - (11.50%*100%*35%) = 7.475% - XZ P. Stock (Div) = 10%- (10.00%*30%*35% = 8.950% I will choose XZ Corp. preferred stock with a return of 10%. because it brings highest AT return. 3.
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