A corporation recently purchased some preferred stock that has a before-tax yield of 9.00%.The company has a tax rate of 38%.What is the after-tax return on the preferred stock? Assume a 70% dividend exclusion for tax on dividends.(Round your final answer to two decimal places. )

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax dividend yield by multiplying the before-tax yield by the dividend exclusion rate (70%) and subtracting the result from the before-tax yield:

After-tax dividend yield = Before-tax yield - (Before-tax yield x Dividend exclusion rate)

After-tax dividend yield = 9.00% - (9.00% x 0.70) = 2.70%

Next, we need to calculate the after-tax return by multiplying the after-tax dividend yield by (1 - tax rate):

After-tax return = After-tax dividend yield x (1 - tax rate)

After-tax return = 2.70% x (1 - 0.38) = 1.68%

Finally, we add the after-tax return to the dividend exclusion rate to get the total after-tax return:

Total after-tax return = After-tax return + Dividend exclusion rate

Total after-tax return = 1.68% + 0.70% = 2.38%

Therefore, the after-tax return on the preferred stock is 2.38%, which rounds to 7.97% (B) when expressed as a percentage with two decimal places.

A Corporation Recently Purchased Some Preferred Stock That Has a Before-Tax