Taxable project with an expected before-tax return

Assignment Help Financial Management

Reference no: EM13870677

A corporation has an average tax rate of 25% and a marginal tax rate of 39%. The corporation can invest in a tax-free project with an expected before-tax return of 6.8% or in a taxable project with an expected before-tax return of 10%. The corporation should:

A) invest in the tax-free project because the after-tax return is greater.

B) invest in the taxable project because the return is greater.

C) be indifferent between the two investments because the after-tax returns are the same.

D) invest in the taxable project because the after-tax return is greater.

Reference no: EM13870677

Questions Cloud

A borrower is faced with choosing between two loans : A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 10% MEY for 30 years, with 6 points included in the closing costs. Loan B would be made for the same amount, but for 11% MEY for 30 years, with 2 points included ..

Two different bonds currently outstanding : The McKeegan Corporation has two different bonds currently outstanding. Bond M has a face value of $13,500 and matures in 17 years. The bond makes no payments for the first 5 years, then pays $700 every six months over the subsequent 7 years, and fin..

The stockholders expected rate of return : AJAX Company paid a dividend today of $4 per share. The dividend is expected to grow at a constant rate of 5% per year. If AJAX Company stock is selling for $56 per share, the stockholders' expected rate of return is

Changes in the interest rates-high quality or low quality : Would high quality bonds higher or lower coupons everything else the same? Which one would be more sensitive to changes in the interest rates, high quality or low quality?

Taxable project with an expected before-tax return : A corporation has an average tax rate of 25% and a marginal tax rate of 39%. The corporation can invest in a tax-free project with an expected before-tax return of 6.8% or in a taxable project with an expected before-tax return of 10%.

Current price under this new assumption of growth rate : A company currently pays a dividend of $2.0 per share. It is estimated that the company's dividend will grow at a rate of 20% per year for the next 4 years, and that the dividend will grow at a constant rate of 7% thereafter. What is your estimate of..

Discuss whether they make bonds more or less risky : Describe at least 5 bond provisions and discuss whether they make bonds more or less risky. Exercise: Consider two bonds, everything else the same except the provision. Would Bond A with the provision be more or less risky than Bond B without the pro..

Corporate bonds of various credit ratings : Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year..

What is the yield to maturity of five-year : What is the yield to maturity of a five-year, $5000 bond with a 4.5% coupon rate and semi annual coupons if this bond is currently trading for a price of $4876?

User Account

All Pages