Please assit to explain the answer to the below Q find the after tax return to a corp. that buys a share of preferred stock at $40 , sells it at year end at $40, and recieves a $4 year end dividend . Tax rate is 30%.

4*(1-0.30) = answer

The profit is $4 before taxes, or $2.80 (= $4 × (1 – 0.3)) after taxes.

The return, therefore, is $2.80 / $40 = 7%.

Thank you very clear.

Please explain the difference between the two answers ans: The total before tax incomeis 4. The corp. May exclude 70% of of div recieved from domestic corporations in thier taxable income; the taxable income is therefore 4×30%=1.2 Income tax : 1.2×30%=$.36 After tax income: $4-$0.36=$3.64 After tax rate of return : $3.64/$$40=9.10% and what he means by …may exclude 70% of …

They mean that of the $4 in dividend income, 70% of it (or $2.80) is not taxable; only the remaining 30% (or $1.20) is taxable.

The tax on that $1.20 is $0.36 (= $1.20 × 30%). So the after-tax income is $4.00 – $0.36 = $3.64.

Put another way, the tax is 30% on only 30% of the income, so the *effective* tax rate is 9% (on the entire income), leaving 91%. Note the an after-tax return of 9.10% is 91% of a before-tax return of 10%.

Appreciated Boss.

D’accord.