Question

A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par, assuming a 70 percent dividend exclusion?

A) 3.6%
B) 7.2%
C) 4.2%
D) 9.6%

Answer 1

The after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par, for a corporation with a 34 percent marginal tax rate and 70 percent dividend exclusion, is found to be approximately 10.8%. However, this rounded value does not match any of the multiple-choice options provided, suggesting an issue with the given options.

Step-by-step explanation:

To calculate the after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par with a 70 percent dividend exclusion, for a corporation with a marginal tax rate of 34 percent, we first determine the amount of the dividend that is subject to tax. Given the 70% exclusion, only 30% of the dividend is taxable. Therefore, the taxable portion of the dividends is 12% * 30% = 3.6%.

The corporation then must pay a 34% marginal tax rate on this taxable portion. The amount of tax paid on the dividend is therefore 3.6% * 34% = 1.224%. Subtracting this tax from the original 12% dividend yield gives us the after-tax yield: 12% - 1.224% = 10.776%.However, since the question asks to present the answer in multiple-choice format with the provided options, we can round the answer to the closest option which is 10.8%, but this answer is not listed in the options provided, indicating a possible discrepancy in the provided choices or an oversight in the computation.