Van Dyke Corporation has a corporate tax rate equal to 36%. The company recently purchased...

Question:

Van Dyke Corporation has a corporate tax rate equal to 36%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

a) 6.78%

b) 5.78%

c) 8.49%

d) 7.14%

e) 5.92%

After-tax Yield:

Context

This question touches on the following topics: preferred stock and yield.

A preferred stock signifies ownership in a company. Preferred stockholders typically do not have voting rights, whereas common stockholders do. However, preferred stockholders have a higher claim to dividends and assets than common shareholders.

The yield on a preferred stock is the income it provides, typically expressed as a percentage. For example, a $1,000 annual payment on a$10,000 bond reflects a 10% yield (1,000/10,000).

The answer is 5.12%. However, none of the answers offered match. The closest is e) 5.92%.

The after-tax yield is the pretax yield on the preferred stock adjusted to reflect the Van Dyke Corporation?s tax on income earned. The formula for computing an after-tax yield is as follows:

After-tax Yield = Pre-tax Yield * (1 - Tax Rate)

Using the information provided, we can solve the problem as follows:

After-tax Yield = .08 * (1 - .36) = .0512 or 5.12%