An Investor Can Invest in Either a Tax-Exempt Security That

question 7

Multiple Choice

An investor can invest in either a tax-exempt security that pays 5%,or a taxable corporate security of comparable risk and maturity that pays 8%.At what marginal tax rate will the investor be indifferent between these two securities?

• A)25.0%
• B)32.5%
• C)37.5%
• D)57.5%
• E)62.5%

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Definitions:

Operating Activities

Aspects of a business related to its core operations, including production, sales, and delivery of its products and services, as reflected in cash flows within the operating section of the cash flow statement.

Cash Dividends

Distributions of earnings from a company to its stockholders, typically in the form of profit sharing.

Direct Method

An approach to preparing the cash flow statement that involves reporting major classes of gross cash receipts and payments.

Operating Activities

Activities that relate directly to the primary business operations of a company, such as selling goods and services, which are reflected in the cash flow statement.