2. Tax issues involving preferred stock

The majority of nonconvertible preferred stock is bought and held by (institutional/individual) investors. (Select the correct choice)

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

A. More likely

B. Doesnt matter

C. Less likely

Consider the case of THC Endowment:

THC Endowment is an institutional investor and owns preferred stocks worth a 20% stake in Scorecard Corp. Scorecard Corp. paid out dividends of $239,400 to THC Endowment this year. Scorecard Corp. had issued perpetual preferred stock with a par value of $100 and pays a(n) 11.40% annual dividend. Investors required return on Scorecard Corp.s preferred stock is 15.28%, and the tax rate for both the companies is 25%. Based on the information given, calculate the following:

- The current market price of Scorecard Corp.s preferred stock is: Value - _____

- THC Endowment tax liability on its dividend income will be: Value - ______

Consider that Scorecard Corp. 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.