Gce Model Questions Vol1 2023 Commerce Question 23

Practice objective / multiple choice question 23 from the 2023 Gce Model Questions Vol1 Commerce examination.

Gce Model Questions Vol1 2023 Commerce Objective / Multiple Choice Hard Difficulty
Question 23 GCE_MODEL_QUESTIONS_VOL1 • 2023 • COMMERCE • objective

A 5‑year corporate bond with a face value of \(\text{₦}100{,}000\) pays an annual coupon of \(8\%\) (paid annually). The bond is currently priced at \(\text{₦}92{,}000\). An investor is also considering buying shares that pay a dividend of \(\text{₦}6{,}000\) per year, with an expected price growth of \(4\%\) per year. The current share price is \(\text{₦}120{,}000\). The investor's marginal tax rate is \(25\%\) on interest income and \(15\%\) on dividend income. Using the approximate yield‑to‑maturity formula for the bond, determine the after‑tax annual return (as a percentage) for both the bond and the share, and state which investment gives the higher after‑tax return.

Answer Options

A. Bond after‑tax return ≈ 6.80 %; Share after‑tax return ≈ 8.25 %; the share gives the higher return.
B. Bond after‑tax return ≈ 7.54 %; Share after‑tax return ≈ 7.90 %; the bond gives the higher return.
C. Bond after‑tax return ≈ 8.10 %; Share after‑tax return ≈ 7.80 %; the bond gives the higher return.
Correct Answer D. Bond after‑tax return ≈ 7.54 %; Share after‑tax return ≈ 8.25 %; the share gives the higher return.
Correct Answer
D
Correct Option:
Bond after‑tax return ≈ 7.54 %; Share after‑tax return ≈ 8.25 %; the share gives the higher return.

About This Question

This is Gce Model Questions Vol1 2023 Commerce Question 23. It is one of the objective questions from the 2023 Gce Model Questions Vol1 Commerce examination.

Difficulty level: Hard .

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