Question

The Omega Corporation has some excess cash it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 9 percent yield; (b) corporate bonds at a 14 percent yield; or (c) preferred stock at an 10 percent yield. Omega Corporation is in a 30 percent tax bracket and the tax rate on dividends is 15 percent.

a-1. Compute the aftertax yields for the three investment options. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

a-2. Which one of the three investments should she select based on the aftertax yields?

• Corporate bond

• Treasury bonds

• Preferred stock

Answer 1

a-2) AS CORPORATE BONDS OFFER MORE AFTER TAX YIELD IT IS SELECTED.