In: Finance
Find the after-tax return to a corporation that buys a share of preferred stock at $52, sells it at year-end at $52, and receives a $7 year-end dividend. The firm is in the 30% tax bracket. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The after tax return is computed as follows:
= Dividend received x (1 - 0.70) x tax rate [ Since 70% of the dividend received is exempt)
= $ 7 x 0.30 x 0.30
= $ 0.63
So, the return will be as follows:
= (Dividend received - tax on dividend) / year end price
= ($ 7 - $ 0.63) / $ 52
= 12.25%