Ms. Zelda has decided to invest $75,000 in state bonds. She could invest in State A bonds paying 5 percent annual interest or in State R bonds paying 5.4 percent annual interest. The bonds have the same risk, and the interest from both is exempt from federal income tax. Because Ms. Zelda is a resident of State A, she wouldnt pay State As 8.5 percent personal income tax on the State A bond interest, but she would pay this tax on the State R bond interest. Ms. Zelda can deduct any state tax payments in the computation of her federal taxable income, and her federal marginal rate is 32 percent.

Required:

1. Compute Ms. Zelda's after-tax return from State A and State R bonds.
2. Should Ms. Zelda invest in the State A or the State R bonds?

State A
Before-Tax Return
State A income tax
Federal Tax Saving from deduction of state income tax
After-Tax Return
State R
Before-Tax Return
State R Income Tax
Federal Tax Saving from deduction of state income tax
After-Tax Return