Question

Buggy Whip Manufacturing Company is issuing preferred stock yielding 10%. Selten Corporation is considering buying the stock. Assume that Buggy's tax rate is 0% due to continuing heavy tax losses, and Selten's tax rate is 30%. What is the after-tax preferred yield for Selten? Assume the tax rate on dividends is 15%.

Answer 1

Preferred Stock dividend are exempted upto 70% of the dividends

After Tax Preferred Yield = Before tax Yield * (1 - (tax rate on dividends * (1 - Exclusion %)))

After Tax Preferred Yield = 10% * (1 - (15% * (1 - 70%)))

After Tax Preferred Yield = 10% * (1 - (15% * 30%))

After Tax Preferred Yield = 10% * (1 - 0.045)

After Tax Preferred Yield = 9.55%

Thumbs up if the answer is correct and satisfied