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

question 7

Multiple Choice

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend yield 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:

Public Distribution

The system of distributing goods and services to the public through government channels, often at subsidized rates.

Privity of Contract

A legal principle indicating that only the parties involved in the contract have the rights and obligations under it.

Section 12(A)(2)

A provision under the Securities Act of 1933 that imposes liability on sellers for making false or misleading statements in the sale of securities.

Securities Act of 1933

A U.S. federal law, also known as the "truth in securities" law, which requires that investors receive financial and other significant information concerning securities being offered for public sale.