Find the after-tax return to a corporation that buys a share of preferred stock at $52,...

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.)

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Expert Solution

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%

jeff jeffy answered 2 years ago

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