A investor wishes to earn 7% on his capital after payment of taxes. If the income from an available investment will be taxed at an average rate of 42%, what minimum rate of return, before payment of taxes, must the investment offer to be justified? A. 12.07 % B. 12.34 % C. 12.67 % D. 12.87 %

The correct answer is A. 12.07 %.

To calculate the minimum rate of return, before payment

$R = \frac{R_a}{(1-t)}$

where:

• $R$ is
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  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.