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Assuming a tax rate of 25%, what is the real return after taxes on an asset which pays 12%, when inflation is 6%? A

Economics Dec 03, 2020

Assuming a tax rate of 25%, what is the real return after taxes on an asset which pays 12%, when inflation is 6%?

A. 3%

B. 2%

C. 4%

D. 0%

Expert Solution

Real return after tax = Nominal interest rate - Nominal interest rate * Tax rate - Inflation rate

Nominal interest rate = 12%

Tax rate = 25%

Inflation rate = 6%

Real return after tax = 12% - 12% * 25% - 6% = 3%

Option A is correct.

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