After completing its capital spending for the year, Carlson Mfg, has $1,000 surplus cash. Sr. Management must choose between investing the cash in T-bills yielding 3% or paying the cash out to investors who would invest in T-bills themselves.

A. If Carlsons corporate tax rate is 35%, what personal tax rate would make the investors indifferent between receiving the dividend vs. letting Carlson investing in T-Bills and returning the proceeds as a dividend?

B. Is the answer to part (a) above reasonable? Why or why not?

C. Suppose the only investment choice is preferred stock that earns a 6% yield. The corporate dividend exclusion is 70%. What personal tax rate will make investors indifferent between Carlson investing in the preferred and distributing the dividend vs. distributing the dividend to investors first and have them by the preferred on their own.

D. Is this a compelling argument for a low dividend payout ratio? Why or why not?