If the marginal income tax rate is 28% and the pre-tax rate of return is 14.5%, what is the after-tax rate of return __________?
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Answer: D. 0.1044
Explanation
After-tax rate of return is calculated as pre-tax return multiplied by one minus the tax rate. Applying the given marginal tax rate and pre-tax return yields the exact after-tax return. Mathematical evaluation of 14.5 percent multiplied by 0.72 results in 0.1044. Taxes reduce the actual investment earnings retained by individual and corporate investors. The tax shield formula determines the net yield of taxable fixed-income investments. Evaluating after-tax returns is essential for accurate investment performance comparisons.
Taxable bond investors must calculate after-tax returns to compare yields with tax-free munis. Corporate finance decisions incorporate after-tax cost of debt in weighted average calculations. Wealth management professionals focus exclusively on after-tax returns for high-net-worth clients. 0.0744 underestimates the after-tax return due to an incorrect tax deduction calculation. 0.0844 represents an erroneous arithmetic formula application for the given tax rate. 0.0944 is mathematically incorrect for the specified pre-tax return and tax bracket.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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