# Question: Assume you are a tax planner for a client with

Assume you are a tax planner for a client with the following concerns.

a. Suppose there exist three riskless assets. The first yields a fully taxable return of 7% before tax; the second yields a pretax return of 6%, only half of which is taxable; and the third yields a 5% fully tax exempt return. Over what range of tax rates does each asset yield the highest after tax return? How does this relate to tax clienteles?

b. Suppose the tax rate schedule is as follows: 20% on the first $ 5,000 of investment income, 30% on the next $ 5,000 of investment income, and 40% on investment income exceeding $ 10,000. If you had $ 150,000 to invest and you had to invest in only one of the three assets, which one would maximize after tax income?

c. Can you beat the investment strategy in (b) by investing in a portfolio of assets? What is the optimal investment (the one that maximizes after tax income) over the range of investment from $ 0 to $ 500,000?

a. Suppose there exist three riskless assets. The first yields a fully taxable return of 7% before tax; the second yields a pretax return of 6%, only half of which is taxable; and the third yields a 5% fully tax exempt return. Over what range of tax rates does each asset yield the highest after tax return? How does this relate to tax clienteles?

b. Suppose the tax rate schedule is as follows: 20% on the first $ 5,000 of investment income, 30% on the next $ 5,000 of investment income, and 40% on investment income exceeding $ 10,000. If you had $ 150,000 to invest and you had to invest in only one of the three assets, which one would maximize after tax income?

c. Can you beat the investment strategy in (b) by investing in a portfolio of assets? What is the optimal investment (the one that maximizes after tax income) over the range of investment from $ 0 to $ 500,000?

## Relevant Questions

Suppose that taxable bonds maturing in 5 years yield 10% per year before tax. a. What risk adjusted appreciation rate on a non dividend paying common stock is required for the following taxpayers to be indifferent between ...Assume you work for a local municipality. Under what conditions is it tax advantageous for municipalities to undertake profit making ventures? Why donâ€™t we see more municipality operated activities? Can you think of some ...How might tax savings be sacrificed to achieve organizational design efficiencies or to mitigate political costs? What is the under completion problem? Provide an example in an R& D drug research setting. How might the costs of this problem be reduced? An owner manager of a firm is contemplating selling it to any one of a number of prospective buyers. The firm has net operating loss carryforwards (NOLs) known to be worth $ 50 million more to the buyers than to the seller. ...Post your question