Question

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

Answer 1

Answer:

18%

Explanation:

Lochemere is evaluating a taxable bond at 7%

= 7/100

= 0.07

The municipal bond is 5.75%

= 5.75/100

= 0.0575

Therefore the break even tax rate can be calculated as follows

Municipal bond = taxable bond × (1-tax rate)

0.0575= 0.07 × (1-t)

0.0575= 0.07(1-t)

1-t= 0.0575/0.07

1-t = 0.82

t= 1-0.82

t= 0.18×100

t= 18%

Hence the break-even tax rate is 18%