Jackson Has the Choice to Invest in City of Mitchell

question 72

Multiple Choice

Jackson has the choice to invest in city of Mitchell bonds or Sundial,Inc.corporate bonds that pay 10% interest.Jackson is a single taxpayer who earns $55,000 annually.Assume that the city of Mitchell bonds and the Sundial,Inc.bonds have similar risk. Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 8%.How would you advise Jackson to invest his money?

• A)Invest in Sundial,Inc.bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds.
• B)Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial,Inc.bonds.
• C)Invest in Sundial,Inc.bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds.
• D)Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial,Inc.bonds.
• E)None of the choices are correct.

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Definitions:

Retained Earnings Account

A component of shareholders' equity that represents the accumulated portion of net income that a company has not distributed to shareholders as dividends.

Cumulative Earnings

The total amount of profit a company has earned over a specific period, often used to assess profitability trends.

Inception

The beginning point or establishment of an activity, agreement, or document.

U.S.GAAP

The collection of authoritative standards and principles for financial accounting and reporting in the United States, established by the Financial Accounting Standards Board.