Question

Find the after-tax return to a corporation that buys a share of preferred stock at $47, sells it at year-end at $47, and receives a $3 year-end dividend. The firm is in the 30% tax bracket.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Step 1 - Calculation of Pre tax or Before tax rate of return

= [(Dividend + Change in price) / Beginning price] * 100

Dividend = $3

Change in price = Ending price - Beginning price

= $47 - $47

= $0

Beginning price = $47

Therefore Pre tax or Before tax rate of return

= [($3 + $0) / $47] * 100

= 6.38297872 %

Step 2 - After tax rate of return

= Pre tax rate of return (1 - tax rate)

= 6.38297872 (1 - 0.30)

= 6.38297872 * 0.70

= 4.47 %

The After tax return is 4.47%