Question

Find the after-tax return to a corporation that buys a share of preferred stock at $46, sells it at year-end at $46, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.

Answer 1

Answer:

7.91%

Explanation:

The total before tax income (end of the year dividend)is $4

After 100 -30 = 70% taxable income

0.3 x $4) = $1.20.

Taxes = (0.30 ×$1.20) = $0.36

After-tax income = ($4 - $0.36) = $3.64

After-tax rate of return = ($3.64/$46)x100%

0.0791 x100% = 7.91%