33:390:400 Lecture Notes - Lecture 3: Preferred Stock, Cumulative Voting

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28 Jul 2021
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Chapter 15 Practice Problems
1. Company ABC pays corporate tax at a 30% rate. Company ABC can
buy a bond in firm XYZ yielding 15 % annual interest or a preferred
stock in firm XYZ yielding a 12% annual dividend payment. Which
choice will provide a higher after-tax return to Company ABC? Assume
that there are dividend taxes and interest income taxes, and that
corporations who receive preferred dividends pay tax only on 30% of the
dividend.
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