Lovell CoPurchased Preferred Stock in Another Company

question 43

Multiple Choice

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)7.39%
• C)7.76%
• D)8.15%
• E)8.56%

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Definitions:

Basis Points

A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument, equal to 0.01%.

Declining Interest Rates

A situation in which the general level of interest rates in the economy is decreasing, affecting borrowing costs, investment returns, and economic activity.

Capital Gain

The profit realized from the sale of a capital asset, such as stock or real estate, when the selling price exceeds the original purchase price.

Term To Maturity

The remaining time until a debt instrument is due for repayment.