Find the after-tax return to a corporation that buys a share of preferred stock at $38, sells it at year-end at $38, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. Remember: The corporations may exclude 50% of dividends received from domestic corporations in the computation of their taxable income.
Computation of after tax return to the corporation:
Total before tax income | $4 |
Less: Tax expense | ($0.6) |
Total after tax income (a) | $3.4 |
Investment in preference share (b) | $38 |
After tax return (a/b)×100 | 8.95% |
Notes:
1. The dividend of $4 is the only income to the corporation.
2. Tax expense on dividend income:
Total before tax income | $4 |
Less: Exempted income ($4×50%) | ($2) |
Total taxable income | $2 |
Tax rate | 30% |
Tax expense ($2×30%) | $0.6 |
_______×________
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