Math Problem Statement
Find the after-tax return to a corporation that buys a share of preferred stock at $55, sells it at year-end at $55, and receives a $4 year-end dividend. The firm is in the 21% tax bracket. Note: Round your answer to 2 decim
Solution
To find the after-tax return for the corporation, we need to account for the dividend received and any taxes applied. The return comes entirely from the dividend, as there is no capital gain (the stock was bought and sold at the same price).
Step-by-step solution:
-
Dividend income:
The corporation receives a $4 dividend at the end of the year. -
Dividend exclusion for corporations:
In the U.S., corporations can generally exclude 50% of dividend income received from other corporations from taxation. This means only 50% of the $4 dividend will be subject to the corporate tax rate. -
Tax on dividend income:
The corporation’s tax rate is 21%. So, the tax on the $2 taxable dividend will be: -
After-tax dividend income:
To find the after-tax income, subtract the tax from the total dividend: -
Return calculation:
Since the stock price remained the same ($55), the return comes only from the dividend. The after-tax return is:Expressed as a percentage, this is approximately:
Final Answer:
The after-tax return is 6.51%.
Would you like more details or have any questions?
Here are five related questions to expand on this:
- What would the return be if the stock price increased during the year?
- How would the return change if the tax rate were higher or lower?
- What if the corporation was not eligible for the dividend exclusion?
- How does the tax treatment of dividends compare to capital gains for corporations?
- What would the return be for an individual investor under the same conditions?
Tip: When investing in dividend-paying stocks, it’s important to understand the tax implications, as they can significantly affect your overall return.
Ask a new question for Free
By Image
Drop file here or Click Here to upload
Math Problem Analysis
Mathematical Concepts
Corporate Taxation
Dividends
After-Tax Return
Percentage Calculation
Formulas
Taxable Dividend = Dividend * (1 - Dividend Exclusion Rate)
Tax on Dividend = Taxable Dividend * Tax Rate
After-tax Return = (After-tax Dividend / Initial Investment) * 100
Theorems
Dividend Exclusion Rule for Corporations
Suitable Grade Level
Undergraduate/Corporate Finance
Related Recommendation
After-Tax Cost of Capital and Component Costs Calculation
Stock Valuation: Calculating the Value of Preferred Stock with Dividend and Rate of Return
Impact of One-Time Dividend on KayKay Stock Value: Corporate Tax Considerations
Calculating Dividend for Preferred Stock - ABC Company
Expected Stock Price After Special Dividend with Tax Considerations