Which of the following statements is correct about a Canadian corporation in the 35 % tax bracket that can invest either in a bond paying 8 % interest or in the preferred stock of another corporation that pays a 6 % dividend?
A)the stock is preferred by approximately.17 %.
B)the stock is preferred by approximately.80 %.
C)the bond is preferred by approximately 1.30 %.
D)the after-tax yields are identical on each.

Question

Quizplus · Accepted Answer

The after-tax yield on the bond is 5.2% (8% * (1 - 0.35)), while the effective tax rate on dividends from another corporation is lower due to the dividend received deduction, making the after-tax yield on the preferred stock higher, thus preferring the stock by approximately 0.17%.

Which of the Following Statements Is Correct About a Canadian