National Business Machine Co. (NBM) has $8 million of extra cash after taxes have been paid....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
National Business Machine Co. (NBM) has $8 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment proceeds will be paid out as a special dividend at the end of three years. In this case, the firm can invest either in Treasury bills yielding 3 percent or in 5 percent preferred stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasu bills with the same yield or in preferred stock. The corporate tax rate is 35 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock dividends. The corporate dividend exclusion of 100 percent applies. Should the cash be paid today or in three years? a. Which of the two options generates the higher aftertax income for the shareholders? (Round the final answers to 2 decimal places Do not round intermediate calculations. Omit $ sign in your response.) If the firm makes the investment Aftertax cash flow to shareholders: T-bills Preferred stock 14 14 If the firm pays out dividend and individual makes the investment Future value of investment: T-bills Preferred stock b. This part of the question is not part of your Connect assignment. National Business Machine Co. (NBM) has $8 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment proceeds will be paid out as a special dividend at the end of three years. In this case, the firm can invest either in Treasury bills yielding 3 percent or in 5 percent preferred stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasu bills with the same yield or in preferred stock. The corporate tax rate is 35 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock dividends. The corporate dividend exclusion of 100 percent applies. Should the cash be paid today or in three years? a. Which of the two options generates the higher aftertax income for the shareholders? (Round the final answers to 2 decimal places Do not round intermediate calculations. Omit $ sign in your response.) If the firm makes the investment Aftertax cash flow to shareholders: T-bills Preferred stock 14 14 If the firm pays out dividend and individual makes the investment Future value of investment: T-bills Preferred stock b. This part of the question is not part of your Connect assignment.
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
What is the relationship between the frequency of data points and the data retention period in CloudWatch? Choose the correct option - Inversely Proportional - Directly proportional - Depends on the...
-
Show that the magnitude of the magnetic field produced at the center of a rectangular loop of wire of length L and width W, carrying a current i, is 2i (L? + W?)2 B = LW
-
An installment loan is paid monthly. The remaining principal is \(\$ 5,498\). If the interest rate is \(12.9 \%\), how much interest is paid that month?
-
How many games would be played with 15 teams using a single-elimination tournament? Compute how many games would be played in the style of tournament and number of teams given in each question....
-
Compare and contrast the following techniques based on costs and benefits: Test data method Base case system evaluation Tracing Integrated test facility Parallel simulation
-
Question 17 5 pts Which of the following could be indicative of cash flow problems or a result of an expansion? Increasing accounts receivable and decreasing inventories. Increasing accounts...
-
HeathCo is a manufacturing company that produces a line of skiwear that is sold under various brand names. The Product Manager of HeathCo has contracted with you to develop a model to forecast...
-
According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is large. b. the initial distribution of legal rights favors the person causing the...
-
Should the auditor have a statutory right to demand responses to confirmation requests?
-
What are the four main areas on which the balanced scorecard is based?
-
Executives in the multibillion-dollar toy industry constantly search for the next big hit, a magical toy that will trigger a nationwide frenzy among youngsters comparable to the mania sparked in...
-
Derry and Co. is a large computer consultancy business that has a division specialising in robotics. Can you identify three non-financial measures that might be used to help assess the performance of...
-
If we wish to separate the following systems by distillation, is CMO approximately valid? a. Methanol and water b. Isopropanol and water c. Acetic acid and water d. Benzene from toluene
-
Imagine that you are the CEO of a large corporation that is facing a crisis. The crisis is threatening your company's short-term profitability, but it is also an opportunity to make changes that will...
-
Consider the following cash flows in Table P5.5. (a) Calculate the payback period for each project. (b) Determine whether it is meaningful to calculate a payback period for project D. (c) Assuming...
-
Qualitative Characteristics} Listed below are the fundamental and enhancing qualitative characteristics that make accounting information useful. a. Relevance b. Faithful representation c....
-
Events and Transactions OBJECTIVE 2 Several events are listed below. a. Common shares are issued to investors. b. An agreement is signed with a janitorial service to provide cleaning services over...
-
Events and Transactions} The following economic events that were related to A\&P Grocery Store occurred during 2018. a. On February 7, A\&P received a bill from Chatham Power and Light indicating...
Study smarter with the SolutionInn App