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# pg 16 - and make Fergie indifferent between investing in...

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marginal tax rate, in which bond should she invest? Fergie’s after tax rate of return on the tax exempt State of New York bond is 5 percent. The Surething bond pays taxable interest of 8 percent. Fergie’s after tax rate of return on the Surething bond is 5.6 percent (i.e., 8% interest income – (8% x 30%) tax = 5.6%). Fergie should invest in the Surething bond. (48) [LO4 PLANNING] Using the facts in the previous problem, what interest rate does the state of New York need to offer to make Fergie indifferent between investing in the two bonds? To be indifferent between investing in the two bonds, the State of New York bond should provide Fergie the same after-tax rate of return as the Surething bond. Fergie’s after tax rate of return on the Surething bond is 5.6 percent (i.e., 8% interest income – (8% x 30%) tax = 5.6%). The state of New York needs to offer a 5.6 percent interest rate to generate a 5.6 percent after-tax return
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Unformatted text preview: and make Fergie indifferent between investing in the two bonds. (49) [LO3] Given the following tax structure, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates? Taxpayer Salary Muni-Bond Interest Total Tax Mihwah 10,000 10,000 600 Shameika 50,000 30,000 ??? Mihwah’s average tax rate is 6 percent. Average Tax Rate = = = 6% A 6 percent average tax rate on Shameika’s \$50,000 taxable income would result in \$3,000 of tax (i.e., 6% x \$50,000 = \$3,000). Thus, Shameika must pay more than \$3,000 tax (e.g., \$3,001) for the tax structure to be progressive with respect to average tax rates. (50) [LO3] Using the facts in the previous problem, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates? Mihwah’s effective tax rate is 3 percent....
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