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29 January, 21:39

Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.

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  1. 29 January, 21:47
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    9.10%

    Explanation:

    Data provided in the question:

    Buying cost of the preferred stocks = $40

    Selling cost of the preferred stock = $40

    Dividends received = $4

    Now,

    The total before-tax income = Dividend received = $4

    After the 70% exclusion for preferred stock dividends,

    The taxable income = 0.30 * $4

    = $1.20

    Thus,

    Taxes = 0.30 * $1.20

    = $0.36

    Therefore,

    The After-tax income

    = $4.00 - $0.36

    = $3.64

    Hence,

    Rate of return = [ After-tax income : Buying cost ] * 100%

    = [ $3.64 : $40.00 ] * 100%

    = 9.10%
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