Investment in preferred stock
Not what you're looking for?
The treasurer of Harmon Bottling Company currently has $100,000 invested in preferred stock yielding 9%. He appreciates the tax advantages of preferred stock and is considering buying $100,000 more with borrowed funds. The cost of the borrowed funds is 11%. He suggests this proposal to his board of directors. The directors are somewhat concerned by the fact that the treasurer is paying 2% more for funds than he is earning. The firm is in a 34% tax bracket.
a) Compute the amount of the aftertax income from the additional preferred stock if it is purchased.
b) Compute the aftertax borrowing cost to purchase the additional preferred stock. That is, multiply the interest cost times (1-tax)
c) Should the treasurer proceed with his proposal?
d) If interest rates and dividend yields in the market go up six months after a decision to purchase is made, what effect will this have on the outcome?
Purchase this Solution
Solution Summary
The solution explains the impact of investing in a preferred stock
Solution Preview
a) Compute the amount of the aftertax income from the additional preferred stock if it is purchased.
70% of dividends are exempt from tax and tax is to be paid in remaining 30% of dividend income. The total dividend income on $100,000 of preferred stock is 100,000 X 9%=$9,000. Tax is to be paid on 9,000X30%=2,700 and the tax amount is 2,700X34% = $918. The after tax income from the ...
Purchase this Solution
Free BrainMass Quizzes
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.