A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pre-tax rate of return.An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pre-tax return.The after tax return to the corporation is _______ and the after tax return to the individual investor is _______.
A) 3.96%; 5.1%
B) 5.39%; 5.1%
C) 6.00%; 6.00%
D) 3.96%; 6.00%

Question

Quizplus · Accepted Answer

Corporations can exclude 50% of dividends received from taxable income, so the effective tax rate on the dividends is 17% (34% * 50%). Thus, the after-tax return for the corporation is 6% * (1 - 0.17) = 5.39%. The individual investor pays 15% tax, so their after-tax return is 6% * (1 - 0.15) = 5.1%.

A Corporation in a 34% Tax Bracket Invests in the Preferred