pg 14 - Since the City of Heflin bond is a tax exempt bond...

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(43) [LO3] Using the facts in the previous problem, if Scot and Vidia earn an additional \$70,000 of taxable income, what is their marginal tax rate on this income? How would your answer differ if they, instead, had \$70,000 of additional deductions? If Scot and Vidia earn an additional \$70,000 of taxable income, their marginal tax rate on the income is 33.00. Marginal Tax Rate = = = 33.00% If Scot and Vidia instead had \$70,000 of additional tax deductions, their marginal tax rate on the deductions would be 30.20 percent. Marginal Tax Rate = = = 30.20% (44) [LO4] Melinda invests \$200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the \$200,000 in a bond recently issued by Surething, Inc. that pays 8 percent interest with similar risk and other nontax characteristics to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. a. What is her after-tax rate of return for the City of Heflin bond?
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Unformatted text preview: Since the City of Heflin bond is a tax exempt bond, Melinda’s after tax rate of return on the bond is equal to its pretax rate of return (6 percent). b. How much explicit tax does Melinda pay on the City of Heflin bond? Since the City of Heflin bond is a tax exempt bond, Melinda pays no explicit tax on the interest earned from the City of Heflin bond. c. How much implicit tax does she pay on the City of Heflin bond? Melinda earns \$12,000 of interest on the City of Heflin bond (i.e., 6% x \$200,000). A similar priced taxable bond (i.e., the Surething, Inc. bond) would pay \$16,000 of taxable interest (i.e., 8% x \$200,000). Melinda pays \$4,000 of implicit tax on the City of Heflin bond (i.e., the difference between the pretax interest earned from a similar taxable bond (\$16,000) and the pretax interest earned from the City of Heflin bond (\$12,000))....
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