Determine the break-even corporate tax rate

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Reference no: EM1312210

Calculation of Capital Budgeting.

1. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

a. 2.40%

b. 3.60%

c. 4.50%

d. 5.25%

2. A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales	$1,000
Costs	600
Depreciation	250
BIT	$150
Interest expense	50
EBT	$100
Taxes (40%)	40
Net income	$60

a. $60

b. $80

c. $90

d. $100

e. $120

3. Mantle Corporation is considering two equally risky investments:

1) A $5,000 investment in preferred stock which yields 7 percent.
2) A$5,000 investment in a corporate bond which yields 10 percent.

What is the break-even corporate tax rate which makes the company indifferent between the two investments?

a. 33.17%

b. 34.00%

c. 37.97%

d. 42.15%

e. 42.86%

Reference no: EM1312210

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