Final answer:
To calculate the after-tax rate of return, subtract the tax paid on the dividend from the dividend income, and divide the result by the purchase price of the stock. In this case, the after-tax rate of return is 8.24%.
Step-by-step explanation:
The question asks us to calculate the after-tax rate of return on a corporation's investment in a share of preferred stock, which was bought at $51, sold at year-end at $51, and produced a $6 year-end dividend, with the corporation being in a 30% tax bracket.
The after-tax return calculation consists of the dividend received minus the taxes paid on that dividend. Here is the step-by-step calculation:
- Calculate the dividend income: $6 (no need to subtract sale price from purchase price as they are equal, so no capital gain to consider)
- Calculate tax on the dividend: $6 × 30% = $1.80
- Calculate the after-tax dividend: $6 - $1.80 = $4.20
- Calculate the after-tax rate of return: ($4.20 / $51) × 100 = 8.24%
The corporation's after-tax rate of return on the preferred stock is 8.24%, after rounding to two decimal places.