# Question: After completing its capital spending for the year Carlson Manufacturing

After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 3.5 percent or paying the cash out to investors who would invest in the bonds themselves.

a. If the corporate tax rate is 35 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?

b. Is the answer to (a) reasonable? Why or why not?

c. Suppose the only investment choice is a preferred stock that yields 6.2 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision?

d. Is this a compelling argument for a low dividend-payout ratio? Why or why not?

a. If the corporate tax rate is 35 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?

b. Is the answer to (a) reasonable? Why or why not?

c. Suppose the only investment choice is a preferred stock that yields 6.2 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision?

d. Is this a compelling argument for a low dividend-payout ratio? Why or why not?

## Answer to relevant Questions

For the company in Problem 2, show how the equity accounts will change if: a. Octagon declares a four-for-one stock split. How many shares are outstanding now? What is the new par value per share? b. Octagon declares a ...In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 80-cent per share cash dividend on the new (post-split) shares represents an increase of 10 percent over last year’s ...You are given the following information concerning options on a particular stock: Stock price = $62 Exercise price = $65 Risk-free rate = 6% per year, compounded continuously Maturity = 6 months Standard deviation = 47% per ...Use the option quote information shown below to answer the questions that follow. The stock is currently selling for $111. a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring ...A put option and a call option with an exercise price of $55 and three months to expiration sell for $2.90 and $6.20, respectively. If the risk-free rate is 4.2 percent per year, compounded continuously, what is the current ...Post your question