Heather Bell, the new cash manager at Centron, a small electronics firm, is exci

Question

Heather Bell, the new cash manager at Centron, a small electronics firm, is excited about the possibilities of investing in high dividend yield stock. She found one, a stable nuclear electrical utility, whose stock is yielding 8%. Centron's marginal federal income tax rate is 35%. a. What would be the dividend capture yield to Centron? b. How much would CP have to yield to be equivalent (on an aftertax basis) to the stock's yield? c. What types of risk should Heather be made aware of?Are there extra return possibilities to offset this risk?

Explanation / Answer

a. Dividend capture yield= 8*(1-.35)= 5.20%

C . Risk of heather=. Company's inability to pay dividend and interest rate risk

Or falling stock prices.

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