The ABC Company has earned $10. It is thinking of paying a cash dividend of $10 per share. Its stockholders would be taxed at a 0.55 rate on ordinary income and 0.20 on capital gains. The stockholders can earn a 0.05 return after tax per year.

The alternative to the cash dividend is to retain for 10 years, and then pay a cash dividend. The firm can reinvest for 10 years and earn 0.12 per year after corporate taxes.

a. How much will an investor have after 10 years with a cash dividend now?

b. How much will an investor have after 10 years if the first dividend is at time 10?

c. How much will an investor have after 10 years if the first dividend is at time 10 and if the investor sells before the stock goes ex-dividend (i.e., the dividend goes to the buyer of the stock)? Assume that a dollar of retained earnings results in a dollar of stock price increase.

d. Assume that the corporate tax rate is 0.46. If the capital had been classified as debt and if the $18.52 of before-tax income were paid as interest, how much would the investor have after 10 years?