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Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion? a. 7.02% b. 8.15% c. 7.39% d. 7.76% e. 8.56%

Answer :

Tundexi

Answer:

c. 7.39%

Explanation:

Preferred dividend rate before tax = 8.4%

Tax rate = 40%

Dividend  exclusion of = 70%

After-tax return = Preferred dividend rate [ 1 - (1-Dividend  exclusion)*(Tax rate)

After-tax return = 8.4% [ 1 - (1-0.70)*(0.40)

After-tax return = 8.4% [1-0.12]

After-tax return = 8.4% * 0.88

After-tax return = 7.39%

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