12.07%
12.34%
12.67%
12.87%
Answer is Right!
Answer is Wrong!
The correct answer is A. 12.07 %.
To calculate the minimum rate of return, before payment of taxes, we can use the following formula:
$R = \frac{R_a}{(1-t)}$
where:
- $R$ is the minimum rate of return, before payment of taxes
- $R_a$ is the desired rate of return after payment of taxes
- $t$ is the tax rate
In this case, we have:
- $R_a = 7\%$
- $t = 42\%$
Substituting these values into the formula, we get:
$R = \frac{7\%}{(1-0.42)} = 12.07\%$
Therefore, the minimum rate of return, before payment of taxes, must be 12.07% in order to justify the investment.
Option B is incorrect because it is the rate of return after taxes, not before taxes. Option C is incorrect because it is the rate of return after taxes, but it is rounded up to the nearest whole number. Option D is incorrect because it is the rate of return after taxes, but it is rounded down to the nearest whole number.