4. Minneapolis Pipelines pays an annual dividend of $.80 per share on its prefer

Question

4.  Minneapolis Pipelines pays an annual dividend of $.80 per share on its preferred stock.  The stock currently sells for $12 per share.  Maplewood Chemicals is considering investing idle cash in either Minneapolis

Minneapolis Pipelines pays an annual dividend of $.80 per share on its preferred stock. The stock currently sells for $12 per share. Maplewood Chemicals is considering investing idle cash in either Minneapolis's preferred stock or a bond yielding 9.8%. If Maplewoods marginal tax rate is 34%, which investment is more attractive?

Explanation / Answer

income from dividends is tax-exempted therefore return on preferred stock = 0.8/12 = 6.66%

where as tax on bond yield = 0.34*9.8% = 3.332%, therefore return on bonds = 9.8% - 3.332% = 6.468%

return from preferred stock is higher, so it is more attractive

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