Ask Question
6 August, 08:56

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return

+2
Answers (1)
  1. 6 August, 12:51
    0
    Investor's before required rate of return is 12.5%

    Explanation:

    The investor required return is the pretax return on the investment before applying the tax rate of 28%.

    The pretax rate of return on the investment can be computed using the after tax return formula below by changing the subject of the formula to pretax rate of return;

    After rate of return=pretax rate of return * (1-t)

    t is the tax rate of 28% or 0.28

    pretax rate of return is unknown

    after tax rate of return is 9%

    pretax rate of return=after tax rate of return / (1-t)

    pretax rate of return=9% / (1-0.28)

    pretax rate of return=9%/0.72

    pretax rate of return = 12.5%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers