Solarcell Corporation has $20,000 that it plans to invest in marketable securities. It is
choosing between AT&T bonds that yield 11.50%, State of Florida municipal bonds that
yield 8.00%, and AT&T preferred stock with a dividend yield of 9.50%. Solarcell's
corporate tax rate is 25%, and 50% of the preferred stock dividends it receives are tax
exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly
on the basis of after-tax returns, which security should be selected? Answer by giving the
D after-tax rate of return on the highest yielding security.
a. 8.63%
b. 10.06%
c. 8.00%
d. 8.31%
e. 7.13%
