Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

To calculate the break-even tax rate, you need to compare the after-tax yield of the taxable bond to the yield of the municipal bond. The formula to calculate the after-tax yield of the taxable bond is:

After-tax yield = Pre-tax yield * (1 - Tax rate)

Given that the pre-tax yield of the taxable bond is 7%, and the yield of the municipal bond is 5.75%, you can set up the following equation to solve for the tax rate:

5.75% = 7% * (1 - Tax rate)

To isolate the tax rate, you can rearrange the equation as follows:

Tax rate = 1 - (5.75% / 7%)

Now, you can plug in the given values and solve for the tax rate:

Tax rate = 1 - (0.0575 / 0.07) = 1 - 0.8214 = 0.1786

So, the break-even tax rate is approximately 17.86%.