Which one of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8% interest or in the preferred stock of another corporation that pays a 6% dividend? Ignore any differences in risk.
A) The preferred stock should be selected because its after-tax yield is 0.17% higher.
B) The preferred stock should be selected because its after-tax yield is 0.80% higher.
C) The bond should be selected because its after-tax yield is 0.17% lower.
D) The bond should be selected because its after-tax yield is 1.3% higher.

Question

Quizplus · Accepted Answer

Bond after-tax yield = 8%(1 − 0.35) = 5.2% Stock after-tax yield = 6% − (6% × 0.30 × 0.35) = 5.37% Difference = 5.37% − 5.2 = 0.17%; the preferred stock is the better investment.

Which One of the Following Statements Is Correct About a Corporation