You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred shares of Canada Leasing The consol has a $ 1,000 par value, an annual coupon rate of 4 , and never matures The preferred share pays fixed dividends of $6 and is expected to continue indefinitely Currentl...

a Both of these instruments are perpetuities Recall the price of a perpetuity is Rearranging the equ ...

You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred shares

Question:

You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred shares of Canada Leasing. The consol has a $ 1,000 par value, an annual rate of 4 %, and never matures. The preferred share pays fixed dividends of $6 and is expected to continue indefinitely. Currently, t he co n sol is selling for $800 and the preferred share for $120.
a. What is the before-tax expected rate of return on each of the investments?
b. If your personal tax rate is 35%, your tax rate is 29%, and capital gains are taxed at 50% of the personal tax rate, what is the after-tax expected rate of return on each investment?
c. What is the expected rate of return on each investment to a Canadian with a corporate tax rate of 35%?
d. Why do you think that many of the preferred shares sold by Canadian corporations are purchased by other Canadian corporations?
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... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... 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...