Question 1:

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 4.6% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Multiple Choice

a) 20.00%

b) 7.60%

c) 6.60%

d) 3.60%

e) 5.75%.

Question 2:

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 25%. If a city of Atlanta bond pays 5.7% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Multiple Choice

a) 25.00%

b) 8.60%

c) 7.60%

d) 5.70%

e) None of the choices are correct.

Question 3:

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 9.90% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Multiple Choice

a) 49.50%

b) 16.50%

c) 9.90%

d) 5.94%

e) None of the choices are correct.

Question 4:

Assume that Will's marginal tax rate is 40% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 9.6%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Multiple Choice

a) 15.84%

b) 15.08%

c) 13.60%

e) 10.88%

f) None of the choices are correct.