Arvo Corporation Is Trying to Choose Between Three Alternative Investments

question 112

Multiple Choice

Arvo Corporation is trying to choose between three alternative investments.The three securities that the company is considering are as follows:
∙Tax-free municipal bonds with a return of 8.8%.
∙Wooli Corporation bonds with a return of 11.75%.
∙CFI Corp.preferred stock with a return of 9.8%.
The company's tax rate is 25%.What is the after-tax return on the best investment alternative?

• A)7.383%
• B)7.772%
• C)8.181%
• D)8.612%
• E)9.065%

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Definitions:

Du Pont Identity

This financial analysis formula breaks down the return on equity into three parts: operating efficiency, asset use efficiency, and financial leverage.

Total Equity

The value of the owners' interest in a company, calculated as the company's total assets minus its total liabilities.

Net Income

The total earnings of a company after all expenses and taxes have been deducted from total revenue, often referred to as the bottom line.

Current Ratio

A liquidity ratio that measures a company’s ability to pay short-term obligations with its current assets.