Hi, I hope all is well. My name is Ali and I'm still struggling with a question from the McGraw Hill's Connect website for the Bodie, Kane, Marcus Investments book. Relevant links are below:

http://connect.mheducation.com/connect/login/index.htm?&BRANDING_VARIANT_KEY=en_us_default_default&node=connect_app_17_251

http://www.mheducation.com/highered/product/investments-bodie-kane/0077861671.html

After giving you some background information, the question I'm struggling with as follows:

Find the after-tax return to a corporation that buys a share of preferred stock at $34,sells it at year-end at $34, and receives a $4year-end dividend. The firm is in the 30% tax bracket.(Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

The answer is not 8.24 % or 3.53%. I know because when I check my answers it gives me red. I used the formula of r=rmuni/(1-t) and alsoused my TI-84 Plus calculator manipulating numbers around based on my knowledge of mathematics and finance and interest rates (basically the stuff you learn from being a Finance major for so long).

I did a google search and found a similar question with the solution provided but still don't understand. The similar question and solution are below.

Question

Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 40% tax bracket.(Hint: recall the 70% exemption on dividend income for corporate dividend payees)

Solution

The holding period return will be the sum of the capital gains return and the dividend or interest income return: R = [(P1-P0+D) / P0] 1. There is no capital gain, since the sale price (P1) is the same as the purchase price (P0=$40).The total return before-tax income is therefore the 4% dividend of $4, of which 0.3 x $4 = $1.2 is taxable income (after the 70% exclusion). Taxes therefore are equivalent to $0.48, for an after tax income of $3.52 = $2.80 (tax-free) + $0.72 (after tax) and a rate of return of 8.8% =($43.52/$40)-1.

Here is another similar question:

Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30 percent tax bracket.

Answer: If the dividend is 100% tax-deductible, the after-tax return to the corporation is 4/40 = 10%.

This answer also does not prove to be correct.

Please help!

The similar question from above can be found at these links:

http://www1.american.edu/academic.depts/ksb/finance_realestate/mrobe/672/PS/PS_1.pdf

http://www.geocities.ws/lufinance/answers/chap2