Question
After completing its capital spending for the year, Carlson Manufacturing has $2,600 extra cash. Carlsons managers must choose between investing the cash in Treasury bonds
After completing its capital spending for the year, Carlson Manufacturing has $2,600 extra cash. Carlsons managers must choose between investing the cash in Treasury bonds that yield 4 percent or paying the cash out 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 Carlson invest the money? |
b. | Is the answer to (a) reasonable? |
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c. | Suppose the only investment choice is a preferred stock that yields 7 percent. The corporate dividend exclusion of 50 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlsons dividend decision?
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d. | Is this a compelling argument for a low dividend-payout ratio? |
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