Assignment:
Calculate the implicit and explicit tax rates for the following three assets. The required pretax total rate of return Ro for each asset is: 15% for the fully taxable asset, 20% for the partially taxable asset, and 10% for the tax-exempt asset. The required pretax risk premium Rrp for each asset is 3% for the fully taxable, 9% for the partially taxable, and 0% for the tax-exempt asset. Prepare a table (first ignoring risk differences and then adjusting for risk differences across assets). Discuss your results. In particular, when ignoring risk differences:
a. What is the top statutory tax rate?
b. Is the partially taxable asset really partially taxable or is it tax disfavored?
c. After adjusting for risk differences, what is the top statutory tax rate? Which asset is most risky?
Provide complete and step by step solution for the question and show calculations and use formulas.