Margaret Owns Land That Appreciates at the Rate of 10

question 114

Multiple Choice

Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero-coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,

• A) Margaret and Ralph will have accumulated the same after-tax amounts.
• B) Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
• C) Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
• D) Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
• E) Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

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Definitions:

Market Value Method

A valuation technique that determines the price an asset would fetch in the marketplace or the value of a company based on the current market price of its shares.

Convertible Bonds

Bonds that can be converted into a predetermined number of the issuing company's shares.

U.S. GAAP

Generally Accepted Accounting Principles in the United States, which are a set of rules and standards for financial reporting.

Interest Expense

The cost incurred by an entity for borrowed funds, representing the interest payments due on any type of debt, including loans, bonds, and lines of credit.