Question

Find the after-tax return to a corporation that buys a share of preferred stock at $55, sells it at year-end at $55, and receives a $4 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

Answer:

after-tax return in dollars: 3.8

after-tax return rate: 6.91%

Explanation:

the gain are the 4 dollars dividends.

We will apply the tax rate to the dividends:

4 x 30% = 1.2

then we calcualte the after tax return in dollars: 4 - 1.2 = 3.8

Now the rate of return after-tax will be:

return / investment

3.8/55 = 0.06909090 = 6.91%