- National Business Machine Company Nbm Has 4 7 Million Of Extra Cash After Taxes Have Been Paid Nbm Has Two Choices T 1 (205.39 KiB) Viewed 14 times
National Business Machine
Company (NBM) has $4.7 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 income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 2.5 percent or 4.9 percent preferred stock. Assume IRS regulations allow the
company to exclude from taxable income 50 percent of the dividends received from investing in another
company's stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield, or in preferred stock. The corporate tax rate is 22 percent. Assume the investor has a 33 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 10 percent on common stock dividends. Suppose the
company reinvests the $4.7 million and pays a dividend in three years. a. What is the total aftertax cash flow to shareholders if the
company invests in T-bills? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the total aftertax cash flow to shareholders if the
company invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) a. Value in three years b. Value in three years
Suppose instead that the
company pays a $4.7 million dividend now and the shareholder reinvests the dividend for three years. c. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) d. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) c. Value in three years d. Value in three years