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

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:

1. **Dividend income:**  
   The corporation receives a $4 dividend at the end of the year.

2. **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.

   \[
   \text{Taxable Dividend} = 50\% \times 4 = 2
   \]

3. **Tax on dividend income:**  
   The corporation’s tax rate is 21%. So, the tax on the $2 taxable dividend will be:

   \[
   \text{Tax} = 2 \times 0.21 = 0.42
   \]

4. **After-tax dividend income:**  
   To find the after-tax income, subtract the tax from the total dividend:

   \[
   \text{After-tax Dividend} = 4 - 0.42 = 3.58
   \]

5. **Return calculation:**  
   Since the stock price remained the same ($55), the return comes only from the dividend. The after-tax return is:

   \[
   \text{After-tax Return} = \frac{\text{After-tax Dividend}}{\text{Initial Investment}} = \frac{3.58}{55} = 0.0651
   \]

   Expressed as a percentage, this is approximately:

   \[
   6.51\%
   \]

### 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:
1. What would the return be if the stock price increased during the year?
2. How would the return change if the tax rate were higher or lower?
3. What if the corporation was not eligible for the dividend exclusion?
4. How does the tax treatment of dividends compare to capital gains for corporations?
5. 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.

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.

Learn how to calculate the after-tax return for a corporation that buys preferred stock at $55, sells it for the same price at year-end, and receives a $4 dividend. The solution includes tax calculations under a 21% corporate tax rate and uses dividend exclusion rules. Suitable for finance students and professionals.

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