Question

The Harsanyi Corp. is considering four investments. Which provides the highest after-tax return for Harsanyi Corp. if it is in the 34% federal tax bracket

Answer 1

Answer:

The correct answer is letter "D": Preferred stock at 6.0%.

Explanation:

After-Tax Return is the revenue companies earn after the tax deduction according to the bracket they fall into. It expresses the firm's real earnings ad can be expressed in ratios (percentages). Calculating the after-tax return implies considering all the profits an organization had within a period and all its costs.

In the example:

• After-tax return on Treasury bonds = 5% x (1 - 0.34) = 3.3%
• After-tax return on corporate bonds = 8% x (1 - 0.34) = 5.28%
• After-tax return on municipal bonds = 5% x (1 - 0.34) = 3.3%
• After-tax preferred return = Before-tax preferred stock yield x [1 - (Tax rate)(0.30)] = 0.06 x [1 - (0.15)(0.30)] = 5.73%

Then, the highest after-tax return is provided by investing in preferred stocks at 6.0%.