If the Real Rate of Return Is 2% (Before Taxes)

question 9

Multiple Choice

If the real rate of return is 2% (before taxes) , the rate of inflation is 5%, and your marginal tax rate is 25%, what is your after-tax nominal return on a risk-free investment? Round your
Answer to the nearest tenth of a percent.

• A)2.2%
• B)5.3%
• C)1.8%
• D)7.3%

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Definitions:

Net Income

The total earnings of a company after all expenses and taxes have been deducted from revenues.

Statement of Cash Flows

A financial report that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

Financing Transactions

Financial activities that involve raising funds for a company, including debt, equity, or other financial instruments.

Investing Transactions

Financial activities related to the acquisition or sale of long-term assets and investments not used in the normal course of business.