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1) Carter Corporation has some money to invest, and its treasurer is selecting between City of Chicago municipal bonds and U.S. Treasury bonds. Both have similar 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 Chicago municipal bonds would make Carter's treasurer indifferent between two?

i) 2.40%

ii) 3.60%

iii) 4.50%

iv) 5.25%

2) Company has following income statement. Computing 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

    i) $60
    ii) $80
    iii) $90
    iv) $100
    v) $120

    3) Mantle Corporation is thinking of two equally risky investments:

    1) A $5,000 investment in preferred stock that yields 7 percent.

    2) A$5,000 investment in a corporate bond that yields 10 percent.

    Compute break-even corporate tax rate that makes company indifferent between two investments?

    i) 33.17%

    ii) 34.00%

    iii) 37.97%

    iv) 42.15%

    v) 42.86%

    Accounting Basics, Accounting

    • Category:- Accounting Basics
    • Reference No.:- M919540

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