18.9 National Business Machine Co. (NBM) has $2 million of extra cash. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets.

The resulted 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 7 percent, or an 11 percent preferred stock. Only 30 percent of the dividends from investing in preferred stock would be subject to corporate taxes. Another alternative is to pay out the cash as dividends and let the shareholders invest on their own in Treasury bills with the same yield. The corporate tax rate is 35 percent, and the individual tax rate is 31 percent.

Should the cash be paid today or in three years? Which of the two options generates the highest after-tax income for the shareholders?