I need to get process how to get those answer. 1. A one year Treasury Bill offer
ID: 2809677 • Letter: I
Question
I need to get process how to get those answer.
1. A one year Treasury Bill offers a yield of 13 per cent. You are in the 28 per cent marginal tax bracket and you require a 3 per cent after tax real return. What rate of inflation are you expecting?
Answer: More than 9 per cent.
2. 4. You have paid $ 23.2665 for a share of preferred stock that pays a $ 5 dividend at the end of each year. Your target after tax real return is 2.75 per cent and you are in the 37 per cent marginal tax bracket.
Answer: 10.5 per cent inflation
3. You have paid $ 36.5191 for a share of preferred stock that pays a $ 9 dividend at the end of each year. You are certain that inflation will be 8.5 per cent and you are in the 49 per cent marginal tax bracket.
Answer: after tax real return is 3.75 per cent.
Explanation / Answer
1.
nominal rate for Tbills=13%
inflation=(1+nominal rate)/(1+real rate)-1
=(1+13%)/(1+3%)-1=9.708%
2.
nominal rate for preferred stocks=dividend*(1-tax rate)/price=5*(1-37%)/23.2665
inflation=(1+nominal rate)/(1+real rate)-1
=(1+5*(1-37%)/23.2665)/(1+2.75%)-1
=10.5%
3.
nominal rate for preferred stocks=dividend*(1-tax rate)/price=9*(1-49%)/36.5191
real rate=(1+nominal rate)/(1+inflation)-1
=(1+9*(1-49%)/36.5191)/(1+8.5%)-1
=3.75%