After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. The companys managers
Question:
After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. The company’s managers must choose between investing the cash in Treasury bonds that yield 3.5 percent or paying out the cash to investors who would invest in the bonds themselves.
a. If the corporate tax rate is 21 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let the company 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 50 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of the company’s dividend decision?
d. Is this a compelling argument for a low dividend payout ratio? Why or why not?
Step by Step Answer:
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan