Jackson Has the Choice to Invest in City of Mitchell

question 8

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. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for year 2016?

• A) 7.50%
• B) 10.00%
• C) 8.00%
• D) 7.20%
• E) None of these

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Definitions:

Required Return

The minimum rate of return an investor expects to receive from an investment.

Growth Rate

The rate at which a company's earnings or revenue grows over a specified period of time, reflecting the company's expansion and performance.

Dividends

Corporate profits that are allocated and paid out to individuals owning stock in the company, effectively sharing a part of the earnings with shareholders.

Cumulative Voting

Procedure where a shareholder may cast all votes for one member of the board of directors.