Find the after-tax return to a corporation that buys a share of preferred stock at $47, sells it at year-end at $47, and receives a $3 year-end dividend. The firm is in the 30% tax bracket.

5.80%

Explanation:

Computation of after-tax return

Based on the information given the total before-tax income will be $3.

Since the firm is in the 30% tax bracket this means that the taxable income will be calculated as:

Taxable income =(0.30 ×$3)

Taxable income = $0.9

The next step is to calculate for the Taxes

The taxes will be = (0.30 ×$0.9) = $0.27

Now let calculate for the After-tax income

After-tax income = ($3 - $0.27) = 2.73

The last step is to find the After-tax rate of return using this formula

After-tax rate of return =After-tax income/Share of preferred stock

Let plug in the formula

After-tax rate of return = ($2.73/$47)

After-tax rate of return=0.058×100

After-tax rate of return = 5.80%

Therefore After-tax rate of return will be 5.80%

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