A corporation buys $100 par value preferred stock of another corporation. The dividend payment is 7.8 percent

Question:

A corporation buys $100 par value preferred stock of another corporation. The dividend payment is 7.8 percent of par. The corporation is in a 35 percent tax bracket.

a. What will be the after-tax return on the dividend payment? Fill in the following table.

Par value
Dividend payment (%)
Actual dividend
Taxable income (30% of dividend)
Taxes (35% of taxable income)
After-tax return (Actual dividend – Taxes)
Percent return =	After-tax return
	Par value

b. Assume a second investment in a $1,000 par value corporate bond pays 8.6 percent interest. What will be the after-tax return on the interest payment? Fill in the table below.

Par value
Interest payment (percent)
Actual interest
Taxes (35 percent of interest)
After-tax return (Actual interest – Taxes)
Percent return =	After-tax return
	Par value

c. Should the corporation choose the corporate bond over the preferred stock because it has a higher quoted yield (8.6 percent versus 7.8 percent)?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...