Question
An engineering firm has $2,000 of extra cash and the CFO, is thinking about what to do with the money. Option 1: The CFO can
An engineering firm has $2,000 of extra cash and the CFO, is thinking about what to do with the money.
Option 1: The CFO can put the $2000 of cash into treasuries for three years currently yielding 6%
or
Option 2: Pay out the $2000 to shareholders now.Of course, shareholders themselves also have access to the treasury market.Most of the equity investors in engineering firm are poor and pay only a 15% personal tax rate.The tax rate on dividends is 18%.The corporate tax rate is 32%.
How much money will shareholders have after 3 years under each option and what should the CFO do?
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