If the marginal income tax rate is 35% and the pre-tax rate of return is 12.5%, what is the after-tax rate of return __________?
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Answer: C. 0.08125
Explanation
The after tax rate of return is calculated by multiplying pre tax return by one minus tax rate. Multiplying the 12.5 percent pre tax return by 0.65 yields the exact decimal value. The resulting figure of 0.08125 represents the true net return after accounting for taxes. Marginal tax rates determine the exact percentage of tax owed on the next dollar of income. Pre tax returns do not reflect the tax liabilities imposed by government revenue agencies. Investors rely on after tax metrics to compare taxable corporate bonds with municipal securities.
Financial planners use after tax returns to help clients build wealth efficiently across taxable accounts. Tax drag significantly diminishes long term portfolio growth if investments generate high ordinary income. Evaluating net yields ensures accurate assessment of purchasing power preservation over long investment horizons. The value 0.0613 represents an incorrect mathematical computation unrelated to the standard after tax formula. The value 0.0713 is a distractor resulting from improper subtraction within the tax adjustment equation. The value 0.0913 fails to apply the correct marginal tax rate multiplier to the pre tax return.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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