If the marginal income tax rate is 46.8% and the pre-tax rate of return is 15.5%, what is the after-tax rate of return _____________?
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Answer: B. 0.08246
Explanation
The after-tax rate of return is calculated by multiplying the pre-tax return by one minus the marginal tax rate. Subtracting the tax rate of forty-six point eight percent from one leaves fifty-three point two percent. Multiplying fifteen point five percent by fifty-three point two percent yields approximately zero point zero eight two four six. Taxes reduce the actual investment earnings retained by an individual or corporate investor. The marginal tax rate represents the tax percentage applied to the last dollar of taxable income. After-tax returns provide a realistic measure of wealth accumulation compared to pre-tax figures.
Financial planners always evaluate after-tax returns when designing wealth management portfolios for clients. For example, taxable bond yields must be adjusted downward by tax rates to compare with municipal bonds. It ensures accurate performance evaluation across different taxable investment vehicles. 0.0725 is an incorrect mathematical result caused by improper tax rate subtraction or multiplication. 0.1025 represents an erroneous return figure that fails to match the correct after-tax formula. 0.0925 is an inaccurate calculation resulting from a faulty application of the tax formula.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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