A company with a 15% tax rate buys preferred stock in another company.The preferred stock has a before-tax yield of 6.50%.Assume a 70% dividend exclusion for tax on dividends.What is the preferred stock's after-tax return? (Round your final answer to two decimal places. )

Question

Quizplus · Accepted Answer

The after-tax return can be calculated as:
After-tax return = before-tax yield * (1 - tax rate) * (1 - dividend exclusion)
After-tax return = 6.50% * (1 - 0.15) * (1 - 0.70)
After-tax return = 6.21%
Therefore, the answer is choice C, 6.21%.

A Company with a 15% Tax Rate Buys Preferred Stock