Compare the After-Tax Returns for a Corporation That Invests in Preferred

question 16

Multiple Choice

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:

• A)common stock returns 2.60% more than preferred.
• B)preferred stock returns 0.34% more than common.
• C)common stock returns 2.32% more than preferred.
• D)returns are equal on an after-tax basis.

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