PART THREE Valuation of Future Cash Flows preferred stock

Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.

dividends. The amount of the dividend and even whether it is paid are decisions based on the business judgment of the board of directors.

2. The payment of dividends by the corporation is not a business expense. Dividends are not deductible for corporate tax purposes. In short, dividends are paid out of the corporation's aftertax profits.

3. Dividends received by individual shareholders are for the most part considered ordinary income by the IRS and are fully taxable. However, corporations that own stock in other corporations are permitted to exclude 70 percent of the dividend amounts they receive and are taxed only on the remaining 30 percent.5

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