Find the aftertax return to a corporation that buys a share

Find the after-tax return to a corporation that buys a share of preferred stock at $30, sells it at year-end at $30, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (Round your answer to 2 decimal places.)

After-tax rate of return             %

Solution

Purchase Price = $30
Dividend received = $4
Selling Price = $30

Pretax Rate of Return = (Selling Price + Dividend received - Purchase Price) / Purchase Price
Pretax Rate of Return = ($30 + $4 - $30) / $30
Pretax Rate of Return = 0.1333

Aftertax Rate of Return = Pretax Rate of Return * (1 - tax)
Aftertax Rate of Return = 0.1333 * (1 - 0.30)
Aftertax Rate of Return = 0.1333 * 0.70
Aftertax Rate of Return = 0.0933
Aftertax Rate of Return = 9.33%