Buggy Whip Manufacturing Company is issuing preferred stock yielding 8%. Selten Corporation is considering buying the stock. Assume that Buggy's tax rate is 0% due to continuing heavy tax losses, and Selten's tax rate is 21%. What is the after-tax preferred yield for Selten? Assume the tax rate on dividends is 15%.

Question

Quizplus · Accepted Answer

After-tax preferred yield = Before-tax preferred stock yield × [1 − (Tax rate) (Taxable amount of dividends)] = 0.08 × [1 − (0.15) (0.30)] = 7.64%

Buggy Whip Manufacturing Company Is Issuing Preferred Stock Yielding 8