You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred shares of Canada Leasing. The consol has a $ 1,000 par value, an annual coupon rate of 4 %, and never matures. The preferred share pays fixed dividends of $6 and is expected to continue indefinitely. Currently, t he co n sol is selling for $800 and the preferred share for $120.
a. What is the before-tax expected rate of return on each of the investments?
b. If your personal tax rate is 35%, your dividend tax rate is 29%, and capital gains are taxed at 50% of the personal tax rate, what is the after-tax expected rate of return on each investment?
c. What is the expected rate of return on each investment to a Canadian corporation with a corporate tax rate of 35%?
d. Why do you think that many of the preferred shares sold by Canadian corporations are purchased by other Canadian corporations?