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Question
Weston Corporation has some money to invest, and its treasurer is choosing between General Motors bonds and State of Illinois bonds. Both have the same maturity, and they are equally risky and liquid. If the Illinois bonds, which are tax-exempt, yield 6 percent, and Weston's marginal income tax rate is 40 percent, what yield on GM bonds would make Weston's treasurer indifferent between the two?
a. 6.0%
b. 7.5%
c. 10.0%
d. 12.5%
e. 15.0%
Answer
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