A Corporation Recently Purchased Some Preferred Stock That Has a Before-Tax

question 57

Multiple Choice

A corporation recently purchased some preferred stock that has a before-tax yield of 7 percent. The company has a tax rate of 40 percent. What is the after-tax yield on the preferred stock?

• A) 4.20%
• B) 5.04%
• C) 5.65%
• D) 6.16%
• E) 7.00%

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Definitions:

Greenmail

A strategy where a large shareholder is bribed by the target company to not take over the company by buying back their shares at a premium price.

Stock Repurchase

A corporate action in which a company buys back its own shares from the marketplace, reducing the number of outstanding shares.

Vertical Acquisition

A business strategy where a company acquires another company that operates in the production process of the same industry but at a different level, such as a supplier or distributor.