Answered step by step
Verified Expert Solution
Question
1 Approved Answer
National Business Machine Company ( NBM ) has $ 5 . 2 million of extra cash after taxes have been paid. NBM has two choices
National Business Machine Company NBM has $ million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting 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 percent or in percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income percent of the dividends received from investing in another companys stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield, or in preferred stock. The corporate tax rate is percent. Assume the investor has a percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is percent on common stock dividends.
Suppose the company reinvests the $ million and pays a dividend in three years.
a
What is the total aftertax cash flow to shareholders if the company invests in Tbills? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to decimal places, eg
a What is the total aftertax cash flow to shareholders if the company invests in preferred stock? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to decimal places, eg
Suppose instead that the company pays a $ million dividend now and the shareholder reinvests the dividend for three years.
b What is the total aftertax cash flow to shareholders if the shareholder invests in Tbills? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to decimal places, eg
b What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to decimal places, eg
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started