2. Tax issues involving preferred stock

Consider the case of THC Endowment:

THC Endowment is an institutional investor and owns preferred stocks worth a 20% stake in Mitata Co. Mitata Co. paid out dividends of $180,600 to THC Endowment this year. Mitata Co. had issued perpetual preferred stock with a par value of $100 and pays a(n) 8.60% annual dividend. Investors' required return on Mitata Co.'s preferred stock is 11.52%, and the tax rate for both the companies is 45%. Based on the information given, calculate the following:

QUESTION: The current market price of Mitata Co.'s preferred stock is:

A. 74.65

B. 100.00

C. 89.58

D. 111.98

QUESTION: THC Endowment tax liability on its dividend income will be:

A. 19,505

B. 81,270

C. 29,257

D. 24,381

QUESTION: Consider that Mitata Co. also issued market auction preferred stock. Which of the following is true about market auction preferred stock?

A. Yield set on the issue after an auction on the preferred stock is the lowest yield sufficient to sell all shares being offered at that auction.

B. Yield set on the issue after an auction on the preferred stock is the highest yield sufficient to sell all shares being offered at that auction.