2. Tax issues involving preferred stock

Preferred dividends are paid from after-tax earnings.

All else being equal, is a firm more or less likely to issue preferred stock if its tax rate increases?

_____ More likely

_____ Doesnt matter

__x____ Less likely

Consider the case of THC Endowment:

THC Endowment is an institutional investor and owns preferred stocks worth a 20% stake in Hack Wellington Co. Hack Wellington Co. paid out dividends of $218,400 to THC Endowment this year. Hack Wellington Co. had issued perpetual preferred stock with a par value of $100 and pays a(n) 10.40% annual dividend. Investors required return on Hack Wellington Co.s preferred stock is 13.94%, and the tax rate for both the companies is 30%. Based on the information given, calculate the following:

	Value
The current market price of Hack Wellington Co.s preferred stock is:	choose from the following: $111.91 or $100.00 or $74.61 or $89.53
THC Endowment tax liability on its dividend income will be:	choose from the following: $23,587 or $65,520 or 15,725 or $19,656

Consider that Hack Wellington Co. also issued market auction preferred stock. Which of the following is true about market auction preferred stock?

_____ 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.

_____ 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.