Answer:
Annual deposit= $2,355.82
Explanation:
Giving the following information:
Number of periods (n)= 3 years
Future Value (FV)= $7,500
Interest rate (i)= 6%
To calculate the annual deposit, we need to use the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual deposit
Isolating A:
A= (FV*i)/{[(1+i)^n]-1}
A= (7,500*0.06) / [(1.06^3) - 1]
A= $2,355.82
If the keyword an advertiser is bidding on is used in the ad and on the landing page, then the advertiser will receive a higher Quality Score for Group of answer choices higher expected CTR more positive landing page experiences by searchers lower bounce rate ad relevance
Answer:
If the keyword an advertiser is bidding on is used in the ad and on the landing page, then the advertiser will receive a higher Quality Score for
ad relevance.
Explanation:
Ad relevance is a component that gives an advertiser higher quality score. It is an indication that the keyword is optimized to meet the customer's search query. It shows how closely the ad matches the customer's search because a correlation exists between the keyword, the ad, and the post-click landing page. It is paramount to achieve ad relevance in any pay-per-click advertising (PPC), otherwise called search engine marketing (SEM) or search advertising, to justify the ad costs.
Lei Corporation has bonds on the market with 12.5 years to maturity, a YTM of 7.2 percent, a par value of $1,000, and a current price of $1,030. The bonds make semiannual payments. What must the coupon rate be on these bonds
Answer:
Coupon rate= 19.1%
Explanation:
Giving the following information:
Years to maturity= 12.5 years
YTM= 7.2 percent
Par value= $1,000
Current price= $1,030
To calculate the coupon, we need to use a financial calculator:
Function= CMPD
n= 12.5
I%= 7.2
PV= -1,030
PMT= solve = $191
FV= -1,000
Now, the coupon rate:
Coupon rate= 191/1,000
Coupon rate= 19.1%
Suppose Skyler invests in an annuity that pays 3.2% annual interest, compounded monthly. If she contributes $155 every month for 10 years, how much interest would she earn during that time
Answer: $3,286.47
Explanation:
Find the future value of the annuity after 10 years.
Number of periods = 10 * 12 months = 120 months
Interest = 3.2% / 12 = 3.2/12%
Future value of annuity = Annuity * ( (1 + rate)^ number of periods- 1) / rate
= 155 * ( ( 1 + 3.2%/12) ¹²⁰- 1) / 3.2%/12
= $21,886.47
The find the amount that the money would have come to without being invested:
= 155 * 120 months
= $18,600
Interest is:
= 21,886.47 - 18,600
= $3,286.47
Hadley Corporation, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 185 Units in beginning inventory 100 Units produced 1,970 Units sold 1,380 Units in ending inventory 690 Variable costs per unit: Direct materials $ 75 Direct labor $ 32 Variable manufacturing overhead $ 12 Variable selling and administrative expense $ 11 Fixed costs: Fixed manufacturing overhead $ 19,700 Fixed selling and administrative expense $ 30,360 What is the total period cost for the month under variable costing?
Answer:
Total period cost for the month $65,240
Explanation:
Product cost under variable costing = Direct materials + Direct labor + Variable overheads
Period cost under variable costing = Fixed manufacturing overheads + All non manufacturing overheads (Variable and fixed)
Calculation of the total period cost using variable costing
Variable selling and administrative expense ($11 × 1,380 units)
$15,180
Fixed manufacturing overhead
$19,700
Fixed selling and administrative expense
$30,360
Total period cost for the month
$65,240
If the subtotal of the income statement debit column is $250,000, the subtotal of the income statement credit column is $300,000, and the total of the Statement of Retained Earnings debit column is $475,000, what is the beginning balance in Retained Earnings
Answer:
$425,000
Explanation:
Calculation to determine the beginning balance in Retained Earnings
First step is to prepare the Income Statement
Revenues $300,000
Less Expenses ($250,000)
Profit $50,000
Now let calculate the beginning balance in Retained Earnings
Using this formula
Beginning balance in Retained Earnings= Statement of Retained Earnings debit column -Income Statement Profit
Let plug in the formula
Beginning balance in Retained Earnings=$475,000-$50,000
Beginning balance in Retained Earnings=$425,000
Therefore the beginning balance in Retained Earnings is $425,000
Often, an organization makes a portion of its ________ accessible to external parties as its extranet.a. blog.b. inner firewall.c. internet.d. intranet.
Answer:
d. intranet.
Explanation:
A local area network (LAN) refers to a group of personal computers (PCs) or terminals that are located within the same general area and connected by a common network cable (communication circuit), so that they can exchange information from one node of the network to another. A local area network (LAN) is typically used in small or limited areas such as a set of rooms, a single building, school, hospital, or a set of well-connected buildings.
Generally, some of the network devices or equipments used in a local area network (LAN) are an access point, personal computers, a switch, a router, printer, etc.
An intranet can be defined as a private computer network established within an organization and is typically used for securely sharing organizational informations, computing resources, operational system, and collaboration tools between employees through an internet protocol (IP). Thus, it's mainly a private network that is only accessible to authorized users or employees within an organization.
However, an organization often makes a portion of its intranet accessible to external parties such as vendors, authorized customers, partners, etc., as its extranet in order to have access to business information.
Walters manufactures a specialty food product that can currently be sold for $21.50 per unit and has 19,500 units on hand. Alternatively, it can be further processed at a cost of $11,500 and converted into 11,500 units of Deluxe and 5,500 units of Super. The selling price of Deluxe and Super are $31.50 and $19.50, respectively. The incremental net income of processing further would be:
Answer:
the incremental net income of processing further is $38,750
Explanation:
The computation of the incremental net income of processing further is given below:
= (11,500 units × $31.50 + 5,500 units × $19.50 - $11,500) - ($19,500 × $21.50)
= ($362,250 + $107,250 - $11,500) - $419,250
= $38,750
Hence, the incremental net income of processing further is $38,750
Martinique Fashion is an all-equity firm that has projected perpetual EBIT of $344,000. The current cost of equity is 12.4 percent and the tax rate is 34 percent. The company is in the process of issuing $989,000 worth of perpetual bonds with an annual coupon rate of 6.6 percent at par. What is the value of the levered firm
Answer:
$2,167,228
Explanation:
Calculation to determine the value of the levered firm
First step is calculate Unlevered firm value using this formula
Unlevered firm value = EBIT(1 - Tax) / Cost of equity
Let plug in the formula
Unlevered firm value = $344,000(1 - 0.34) / 0.124
Unlevered firm value = $344,000(0.66)/0.124
Unlevered firm value = $1,830,968
Now let calculate the Levered firm value using this formula
Levered firm value = Unlevered firm value + (Debt * Tax rate)
Let plug in the formula
Levered firm value = $1,830,968 + ($989,000 * 0.34)
Levered firm value = $1,830,968+$336,260
Levered firm value = $2,167,228
Therefore the value of the levered firm is $2,167,228
When capital is plotted on the vertical axis and labor is plotted along the horizontal axis, the marginal rate of technical substitution (MRTS) of labor for capital along a convex isoquant A. declines as more and more labor is used. B. equals the negative of the slope of the isoquant. C. equals the marginal product of labor divided by the marginal product of capital. D. All of the above are correct. E. Only answers A and B are correct.
Answer: D. All of the above are correct.
Explanation:
The marginal rate of technical substitution (MRTS) refers to the economic theory which explains the rate at which a particular factor of production must reduce in order for the same level of productivity to be maintained when there's another production factor which is increased.
When the capital is plotted on the vertical axis and labor is plotted along the horizontal axis, then the marginal rate of technical substitution of labor for capital along a convex isoquant will reduce as more and more labor is used. Also, the MRTS equals the negative of the slope of the isoquant and equals the marginal product of labor divided by the marginal product of capital that's MRTSL,K=-MPL/MPK
Therefore, the correct option is All of the above.
Calculate the geometric average return earned by an investor over three years if she earned 6% in the first year of an investment, 12% in the second year and 10% in the third year.
Answer:
8.96%
Explanation:
[tex]\sqrt[\frac{1}{n} ]{x1. x2.x3...}[/tex] = geometric average return
n = number of observations
x1 = observations
(0.06 x 0.12 x 0.1)^(1/3) = 0.0896 = 8.96%
What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent
Answer:
5.55%
Explanation:
risk premium = market rate of return - risk free rate
8.35 - 2.8 = 5.55
A cost-benefit analysis of a highway is difficult to conduct because analysts a. are unlikely to have access to costs on similar projects. b. cannot estimate the explicit cost of a project that has not been completed. c. are not able to consider the opportunity cost of resources. d. will have difficulty estimating the value of the highway.
Answer:
d. will have difficulty estimating the value of the highway.
Explanation:
Cost-benefit analysis (CBA) is used to examine and compare the cost associated with a project or task and the benefits derived from it.
Simply stated, cost-benefit analysis is a form of utilitarianism commonly used by individuals, business firms and government in the decision-making process, as all the cost incurred are determined and analyzed.
This ultimately implies that, it may be used to determine how changes in differing levels of activities such as costs and volume affect a company's operating income and net income.
Cost-benefit analysis (CBA) sums the total cost associated with a project (activity) and compares this cost against the total benefits that would be generated. Thus, it helps in the decision-making process by comparing the net present value (NPV) of the cost of a particular project with the net present value (NPV) of its benefits.
In this context, the cost-benefit analysis of a highway would be difficult to conduct because analysts will have difficulty estimating the value of the highway.
This ultimately implies that, the value or cost benefits associated with the highway is difficult to ascertain or estimate.
Waupaca Company establishes a $350 petty cash fund on September 9. On September 30, the fund shows $104 in cash along with receipts for the following expenditures: printing expenses, $40; postage expenses, $123; and miscellaneous expenses, $80. The petty cashier could not account for a $3 shortage in the fund.
Prepare:
(1) the September 9 entry to establish the fund,
(2) the September 30 entry to reimburse the fund, and
(3) an October 1 entry to increase the fund to $400.
Answer: Please see explanation for answers
Explanation:
Journal to record establishment of fund
Date Account titles and explanation Debit Credit
Sept 9 Petty cash $350
To Cash $350
Journal to record the reimbursement of petty cash fund
Date Account titles and explanation Debit Credit
September 30 printing expenses $40
Postage expense $123
Miscellaneous expenses $80
Cash shortage - not accounted for $3
To Cash $246
Journal to show the increment of fund to $400
Date Account titles and explanation Debit Credit
October 1 Petty cash $50
To Cash $50
Calculation : ($400 - $350)=$50
Darius, Inc. has the following income statement (in millions): DARIUS, INC. Income Statement For the Year Ended December 31, 2012 Net Sales $300 Cost of Goods Sold 120 Gross Profit 180 Operating Expenses 44 Net Income $136 Using vertical analysis, what percentage is assigned to Cost of Goods Sold? Group of answer choices 30% 40% 100% None of the above
Answer:
40%
Explanation:
Calculation to determine what percentage is assigned to Cost of Goods Sold
Using this formula
Cost of Goods Sold percentage=
Cost of Goods Sold /Net Sales
Let plug in the formula
Cost of Goods Sold percentage=$120/$300*100
Cost of Goods Sold percentage=0.40*100
Cost of Goods Sold percentage=40%
Therefore the percentage assigned to Cost of Goods Sold is 40%
On December 1, 2020, Junction Company issued at 104, 800 of its 9%, 10-year, $1,000 par value, nonconvertible bonds with detachable stock purchase warrants. Each bond carried two detachable warrants; each warrant was for one share of common stock at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No fair value can be determined for the bonds without the warrants. Interest is payable on December 1 and June 1. Provide the entry to record issuance of the bonds by Junction Company on December 1, 2020.
Answer:
Junction Company
Journal Entry
December 1, 2020:
Debit Cash $832,000
Credit Bonds Payable $800,000
Credit Bonds Premium $27,038
Credit Warrants Liability $4,962
To record the issuance of the bonds.
Explanation:
a) Data and Calculations:
December 1, 2020:
Face value of nonconvertible bonds with detachable stock purchase warrants = $800,000
Issue price of bonds = $832,000 (1.04 * 800 * $1,000)
Number of bonds issue = 800
Par value per bond = $1,000
Maturity period = 10 years
Coupon interest rate = 10%
Option price of each warrant = $15 per common stock share
Market price of the option = $3
Value of warrant = $4,800 ($3 * 800 * 2)
Allocation of bond price:
Bonds = $827,038 ($800,000/$804,800 * $832,000)
Warrants = $4,962 ($4,800/$804,800 * $832,000)
Assume the money supply is $800, the velocity of money is 8, and the price level is 2. Using the quantity theory of money: a. Determine the level of real output.
Answer:
3200
Explanation:
The computation of the level of real output is given below;
We know that
Money supply × velocity of money = Price level × Real output
And,
Nominal output = Price level × real output.
Now
a) level of real output = money supply × velocity of money ÷ price level
= 800 × 8 ÷ 2
= $6400 ÷ 2
= 3200
Delaware Chemical Company uses oil to produce two types of plastic products, P1 and P2. Delaware budgeted 28,300 barrels of oil for purchase in June for $71 per barrel. Direct labor budgeted in the chemical process was $221,000 for June. Factory overhead was budgeted at $361,700 during June. The inventories on June 1 were estimated to be:
Question Completion:
The inventories on June 1 were estimated to be:
Oil $15,200
P1 8,500
P2 8,600
Work in process 12,900
The desired inventories on June 30 were:
Oil $16,100
P1 9,400
P2 7,900
Work in process 13,500
Use the preceding information to prepare a cost of goods sold budget for June 2015
Answer:
Delaware Chemical Company
The Cost of goods sold budgeted for June 2015 is:
= $2,597,500.
Explanation:
a) Data and Calculations:
Budgeted purchase of barrels of oil for June = $2,009,300 (28,300 * $71)
Budgeted direct labor for June 221,000
Budgeted factory overhead for June 361,700
The inventories on June 1 were estimated to be:
Oil $15,200
P1 8,500
P2 8,600
Work in process 12,900
Beginning inventory $45,200
The desired inventories on June 30 were:
Oil $16,100
P1 9,400
P2 7,900
Work in process 13,500
Ending inventory $39,700
Cost of goods sold:
Beginning inventory $45,200
Budgeted purchase 2,009,300
Budgeted direct labor 221,000
Budgeted factory overhead 361,700
Ending inventory (39,700)
Cost of goods sold = $2,597,500
Which of the following control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system? Multiple Choice Segregation of duties. Ensure proper authorization of transactions. Adequately safeguard assets. Independently verify the transactions.
Answer: Independently verify the transactions.
Explanation:
As the computerized accounting system is new, there is a certain warranted level of distrust in it which will only go away after the system consistently performs well.
Until such a time, it is important that every transaction that is processed by the system is independently verified so as to see if the system processed the transaction well. Only after satisfactory results over a period of time will the system become trusted.
Beginning work in process are 40,000 units and units started this period are 20,000 units. The total units to account for are:______.
Answer: 60,000
Explanation:
Since we are given the information that the beginning work in process are 40,000 units and units started this period are 20,000 units, then the total units to account for will be the addition of the beginning work in process and the units started this period. This will be:
= 40000 + 20000
= 60000
Therefore, the total units to account for is 60000.
In 2010 the Federal Reserve Board (the Fed) reported that nonfinancial companies in the United States had around $2 trillion in cash and short-term liquid assets. As the U.S. economy was still struggling, consumer spending remained low, and companies resisted in investing in new projects that would create value for their stakeholders.
As the economy improves, uncertainty in the markets decreases, and companies will start investing in projects. However, the challenge of analyzing and selecting projects that would generate cash flows and returns and add value to the firm would remain.
The assumptions in the analysis about cost of equity and debt—overall and for projects—have a significant impact on the type and the value of investments that a company makes.
According to the Association of Finance Professionals’ report, published in 2011 on current trends in estimating and applying the cost of capital, companies use a discount rate that is usually above or below 1% of the company’s true rate. Using this information and certain inputs from the Fed, Michael Jacobs and Anil Shivdasani estimated that a 1% drop in the cost of capital leads U.S. companies to increase their investment by about $150 million over three years.
Based on your understanding of the concept of cost of capital, which of the following statements are valid?
a. Companies always use the weighted average cost of capital (WACC) as the discount rate to analyze the financial viability of projects.
b. A company’s estimate of cost of capital impacts its application in the analysis of new investments that, consequently, affects the value of the firm and shareholders’ wealth.
c. Investors care about the incremental value addition that new projects are making; they are least concerned with the discount rates that the company uses.
d. Companies incorporate the required rate of return in the cost of capital to compensate investors for the components’ risks.
Answer:
b. A company’s estimate of cost of capital impacts its application in the analysis of new investments that, consequently, affects the value of the firm and shareholders’ wealth. d. Companies incorporate the required rate of return in the cost of capital to compensate investors for the components’ risks.Explanation:
A company's estimate of cost of capital, is serious because it is used in the calculations of the returns from a new investment which is used to calculate the value of the firm and its shareholders. They therefore need to make these estimates as accurate as possible.
Companies also incorporate the required rate of return in the cost of capital so that the investors who provided this capital, can be ensured of a return on their investment because it would be accounted for in analysis of new investments.
Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:___.
A. $8, 167.50.
B. $9, 652.50.
C. $9, 750.00.
D. $8, 250.00.
E. $8, 152.50.
Answer:
A. $8, 167.50
Explanation:
The fact Juniper company returned $1,500 worth of merchandise, means that it is only obliged to pay the amount of $8,250($9,750-$1,500).
However, the payment was made on 16th August, which is the discount period of 10 days, hence, the cash paid on August 16 is computed thus:
cash paid=amount of merchandise owed*(1-discount rate)
discount rate=1%(1% discount if payment is made within 10 days of the purchase date)
cash paid=$8,250*(1-1%)
cash paid=$ 8,167.50
i.What is a back yard garden?
ii.State three benefits that can be derived from a backyard garden.
Answer:
a back yard garden is a graden located in residential property
ii) lessen the amount of groceries bought thus less money spentfreshly grown vegetables and fruits are consumed moreyou get to decide what pesticides and fertilizers you want to useAssume that the U.S. borrowing rate is 8% while the German is 10%. If Euros are borrowed by a U.S. firm for one year, they would have to _____ against the dollar by_____ to have the same effective financing rate as borrowing dollars. Group of answer choices Appreciate, 1.1818%. Appreciate, 1.8518%. Depreciate, 1.6363%. Depreciate, 1.8518%. Depreciate, 1.1818%.
Answer:
Depreciate 1.1818
Explanation:
U.S. has a borrowing rate of 8% and German has borrowing rate of 10%. If U.S. dollars are borrowed from firm then Euros will depreciate to match with the dollar borrowing.
[1 + 8% ] / [ 1 + 10%] - 1 = - 1.1818
NetonBe makes sweaters, which traditionally involved the following steps: dyeing (i.e., into six different colors), knitting of the dyed fabric into three sizes each (small, medium, and large) and then distributing to the stores. As such, there were 18 different sweater color & size combinations in the end, each with a demand that is normally distributed with a mean of 1,000 and a standard deviation of 100. NetonBe has just developed a new system that allows them to knit a generic color sweater first, and then dyeing this generic sweater. As such, they only need to hold safety inventory for the three sizes, each with an average demand of 6,000. What would be the standard deviation in demand for each of these three generic sweaters?
a) Approximately 600
b) Approximately 300
c) Approximately 245
d) Approximately 60
Answer:
NetonBe
The standard deviation in demand for each of these three generic sweaters is:
a) Approximately 600
Explanation:
a) Data and Calculations:
Different sweater color & size combinations in the end = 18
Normally distributed demand mean of size = 1,000
Total demand of sizes = 18,000
Standard deviation of each size = 100
Standard deviation = 10% of mean (100/1,000 * 100)
Standard deviation for the total sizes = 1,800 (18,000 * 10%)
Average demand of new three sizes = 6,000
Total demand for the three new sizes = 18,000 (6,000 * 3)
Therefore, the standard deviation in demand for each of these three generic sweaters will be = 600 (6,000 * 10%)
When the United States sends money to Japan to help earthquake survivors, in which account is this transaction recorded
Answer:
When the United States sends money to Japan to help earthquake survivors, in which account is this transaction recorded? o credit item in that country's balance of payments.
The Omega started the year with $650,000 in the common stock account and $1,318,407 in the additional paid-in surplus account. The end-of-year balance sheet showed $720,000 and $1,299,310 in the same two accounts, respectively. What is the cash flow to stockholders if the firm paid $68,500 in dividends
Answer:
$17,597
Explanation:
Calculation to determine the cash flow to stockholders
Using this formula
Cash flow to stockholders = Dividends paid - Common stock issued
Let plug in the formula
Cash flow to stockholders= Dividends 68,500 - (1299,310+ 720,000)- (1318407+ 650000)
Cash flow to stockholders= Dividends 68,500 - (2,019,310-1,968,407)
Cash flow to stockholders= 68,500-50,903
Cash flow to stockholders= $17,597
Therefore the cash flow to stockholders if the firm paid $68,500 in dividends is $17,597
Kuley plans to retire in 8 years with $263,700 in her account, which has an annual return of 8.17 percent. If she receives annual payments of X, with her first payment of X received in 8 years and her last payment of X received in 15 years, then what is X, the amount of each payment
Answer:
Kuley
If she receives annual payments of X, with her first payment of X received in 8 years and her last payment of X received in 15 years, then the amount of each payment is:
X = $50,944.35
Explanation:
a) Data and Calculations:
Amount in savings account in 8 years' time = $263,700
Annual return rate = 8.17%
Period of savings from Year 8 to Year 15 = 7 years
Annual payments = X
X = $50,944.35
From an online financial calculator, the payment is determined as follows:
N (# of periods) 7
I/Y (Interest per year) 8.17
PV (Present Value) 263700
FV (Future Value) 0
Results
PMT = $50,944.35
Sum of all periodic payments $356,610.45
Total Interest $92,910.45
Ryan Company deposits all cash receipts on the day they are received and makes all cash payments by check. Ryan's June bank statement shows $27,861 on deposit in the bank. Ryan's comparison of the bank statement to its cash account revealed the following
Deposit in transit 3,350
Outstanding checks 1,350
Answer: $29,861
Explanation:
In order to adjust the bank statement balance to the books, the following is done:
= Bank statement + Deposit in transit - Outstanding checks
= 27,861 + 3,350 - 1,350
= $29,861
Resource X is necessary to the production of good Y. If the price of resource X falls, the equilibrium price of Y will ______________ and the equilibrium quantity of Y will ________________.
Answer:
fall
rise
Explanation:
If the cost of resource x falls, it becomes cheaper to produce good y. This leads to an increase in supply of y. the supply curve of good y shifts out. As a result, equilibrium price falls and quantity rises
Eric receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: A low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Eric's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Nominal Interest After-Tax After-Tax (Percent) Rate Rate Nominal Interest Rate Real Interest (Percent) (Percent) (Percent) (Percent)2.0 4.5 7.0 4.5Compared with higher inflation rates, a lower inflation rate will_________ nominal interest income. This tends to_________ the after-tax real interest rate when the government taxes saving, thereby________ the quantity of investment in the economy and________ the economy's long-run growth rate.
Solution :
Given :
The bonds offer a [tex]\text{real interest rate}[/tex] of 4.5% per year
Tax rate = 10% = 0.10
Inflation rate = 2
[tex]\text{Nominal interest rate}[/tex] = [tex]\text{real interest rate}[/tex] + [tex]\text{inflation rate}[/tex]
[tex]\text{Nominal interest rate}[/tex] = 2 + 4.5
= 6.5
[tex]\text{After tax nominal rate}[/tex] = [tex]\text{Nominal interest rate}[/tex] [tex]$\times (1-\text{tax rate})$[/tex]
[tex]\text{After tax nominal interest rate}[/tex] = [tex]$6.5 \times (1-0.10)$[/tex]
[tex]$=6.5 \times 0.90$[/tex]
= 5.85
After tax real interest rate = [tex]\text{after tax nominal rate}[/tex] - [tex]\text{inflation rate}[/tex]
= 5.85 - 2.0
= 3.85
[tex]\text{Inflation rate}[/tex] = 7.0
[tex]\text{Real interest rate = 4.5}[/tex]
[tex]\text{Nominal interest rate}[/tex] = [tex]\text{real interest rate}[/tex] + [tex]\text{inflation rate}[/tex]
= 7 + 4.5
= 11.5
[tex]\text{After tax nominal interest rate}[/tex] = [tex]\text{Nominal interest rate}[/tex] [tex]$\times (1-\text{tax rate })$[/tex]
[tex]$=11.5 \times (1 - 0.10)$[/tex]
[tex]$=11.5 \times 0.90$[/tex]
= 10.35
[tex]\text{After tax nominal interest rate}[/tex] = 11.5 x (1 - 0.10)
= 11.5 x 0.90
= 10.35
[tex]\text{After tax nominal interest rate}[/tex] = [tex]\text{after tax nominal rate}[/tex] - [tex]\text{inflation rate}[/tex]
= 10.35 - 7.0
= 3.35
Putting all the value in table :
[tex]\text{Inflation rate}[/tex] Real interest Nominal interest After tax nominal After tax
rate rate interest rate interest rate
2.0 4.5 6.5 5.85 3.85
7.0 4.5 11.5 10.35 3.35
Comparing with the [tex]\text{higher inflation rate}[/tex], a [tex]\text{lower inflation rate}[/tex] will increase the after after tax real interest rate when the government taxes nominal interest income. This tends to encourage saving, thereby increase the quantity of investment in the economy and the increase the economy's long-run growth rate.