fm3 18 - Answer: After-tax return income at t = 27%: Exxon...

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Mini Case: 3 - 18 j. Assume that you are in the 27 percent marginal tax bracket and that you have $5,000 to invest. You have narrowed your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?
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Unformatted text preview: Answer: After-tax return income at t = 27%: Exxon = 0.10($5,000) - (0.10)($5,000)(0.27) = $365. California = 0.07($5,000) - $0 = $350. Alternatively, calculate after-tax yields: A-T yield Exxon = 10.0%(1 - t) = 10%(1 - 0.27) = 7.3%. A-T yield Calif. = 7.0%. At what marginal tax rate would you be indifferent? 7.0% = 10.0%(1 - t). Solve for t. 7.0% = 10.0% - 10.0%(t) 10.0%(t) = 3% t = 30%....
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