Question

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 10.00%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion? (Round your final answer to two decimal places.) a. 8.50% b. 8.95% c. 10.47% d. 10.02% e. 7.34%

Answer 1

The correct answer is Option B i.e. 8.95%.

Calculation of the same are given below.

Tax Rate = 35%

Preference Dividend yield before tax = 10%.

After Tax Return on Preferred stock = Dividend Rate {1- ( 1-Dividend Exclusion in percentage) ( Tax Rate ) }

After Tax Return on Preferred Stock = 0.10 { 1- ( 1- 0.70 ) ( 0.35 )}

After Tax Return on Preferred Stock = 0.10 { 1 - ( 0.30 ) ( 0.35 )}

After Tax Return on preferred stock = 0.10 { 1 - 0.105)

After Tax Return on preferred stock = 10 * 0.895

After tax Return on preferred stock = 8.95%.

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