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Corporation Issuing or Buying Preferred Stock

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You are told that one corporation just issued $100 million of preferred stock and another purchased $100 million preferred stock as an investment. You are also told that one firm has an effective tax rate of 20 percent, whereas the other is in the 35 percent bracket. Which firm is more likely to have bought the preferred? Explain.

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Solution Summary

This solution discusses the tax consequences of issuing preferred stock and investing in preferred stock.

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The corporation in the 35 percent bracket would be more likely to buy the preferred stock. Because preferred stock bears a fixed dividend, investors frequently invest in preferred stock instead of investing in bonds or other interest-bearing instruments. However, all ...

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