38. After-tax yields (S31.5) Suppose you are a wealthy individual paying 35% tax on income.

What is the expected after-tax yield on each of the following investments?

a. A municipal note yielding 7.0% pretax.

b. A Treasury bill yielding 10% pretax.

c. A floating-rate preferred stock yielding 7.5% pretax.

How would your answer change if the investor is a corporation paying tax at 35%? What other factors would you need to take into account when deciding where to invest the corporation’s spare cash?

CHALLENGE