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Assignment 2: Tax Issues Associated with Financial Planning

In: Business and Management

Submitted By SeanjoseJ
Words 381
Pages 2
What is the after-tax return on Bill’s corporate bonds for the current year?
Bill Smith, a manager of a restaurant/bar in Los Angeles, is in the 25% marginal tax bracket and pays an additional 5% in taxes to the state of California. Bill has $20,000 invested in corporate bonds which is currently earning an average annual return of 7.5%.
To calculate the returns on the 7.5%, carry out the following steps:
Returns = pre-tax return (1-tax rate)
What I did first was add the marginal tax 25% and the state tax 5% to show he pays 30% in all for taxes. Next I input the return and the Taxes into the formula.
=7.5%(1-30%) I then change the percentage into decimals =.075(1-.3) I then solve
1-.30=.7x.075= .0525 or a percentage of 5.25% and 5.25% of 20,000 is 1,050
What is the after-tax return on his municipal bonds for the current year?
Additionally, Bill also has another $20,000 invested in municipal bonds from the city of Los Angeles that are being used to redevelop depressed areas downtown. These bonds pay an average return of 5.4%.
To calculate the returns on the 5.4%, carry out the following steps:
What I did first was add the marginal tax 25% and the state tax 5% to show he pays 30% in all for taxes. Next I input the return and the Taxes into the formula.
=5.4%(1-30%) I then change the percentage into decimals =.054(1-.3) I then solve
1-.30=.7x.054= .0378 or a percentage of 3.78% and 3.78% of 20,000 is 756

Which investment earns more returns: corporate or municipal bonds?
If my calculations are correct it seems the corporate bond return is larger than the municipal bonds. With corporate at a return of 5.25% over the Municipal rate of 3.78%
What would the balance in each account be at the end of the fifteenth year?
After a 15 year period the corporate return will be 43,088.54 if he decides not to contribute and the municipal will be 34,892.72 at the end…...

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