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?
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).
Answer and Explanation:
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%
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10