Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend yield versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.The:
A) common stock returns 2.60% more than the preferred.
B) preferred stock returns 0.34% more than the common.
C) common stock returns 2.32% more than the preferred.
D) returns are equal on an after-tax basis.

Question

Quizplus · Accepted Answer

After-tax returns: R_P = 0.12 − (0.12 × 0.30 × 0.35) = 0.1074, or 10.74%R_C = 0.16(1 − 0.35) = 0.1040, or 10.40%Difference = 10.74% − 10.40 = 0.34%

Compare the After-Tax Returns for a Corporation That Invests in Preferred