Which security has the best after-tax earnings

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Charlie Company has $10,000 which it plans to invest in marketable securities. It is choosing between AT&T bonds, which yield 11 percent, State of Florida municipal bonds, which yield 8 percent (tax-free), and AT&T preferred stock, with a dividend yield of 9 percent. Charlie's corporate tax rate is 20 percent and 70 percent of the dividends it receives are tax exempt. Assuming that the three investments are equally risky and that Charlie chooses strictly on the basis of after-tax returns:

a. Which security has the best after-tax earnings?

b. At what tax rate would Charlie Company be indifferent between the two bonds?

c. At what tax rate would Charlie Company be indifferent the two AT&T securities?

Reference no: EM132444205

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