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

question 49

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%. The:

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

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Definitions:

Progressive Taxes

A taxation system where the tax rate increases as the taxable amount increases, generally considered more equitable as it places a heavier burden on those who have the ability to pay more.

Regressive Taxes

Taxes that take a larger percentage of income from low-income earners than from high-income earners, disproportionally burdening the former.

Feudalism

A medieval European social system in which land was held by nobles in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants were obligated to live on their lord's land and give him homage, labor, and a share of the produce.

Expansion Of Exploration

The process or act of searching for new knowledge, resources, or territories.