Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 6.00%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion? (Round your final answer to two decimal places.)

5.37%

Explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the company's after tax return on preferred by using following formula:-

Company's After Tax Return = Before Tax Dividend Yield Rate on Preferred Stock * [1 - (1 - Dividend Exclusive) * (Tax Rate) ]

= 6% * [1 - (1 - 70%) * (35%) ]

= 0.06 * [1 - (1 - 0.70) * (0.35) ]

= 0.06 * [1 - (0.30) * (0.35) ]

= 0.06 * (1 - 0.105)

= 0.0537

= 5.37%

We simply applied the above formula to determine the company after tax return