Problem 17-16 Dividends versus Reinvestment [LO2]

After completing its capital spending for the year, Carlson Manufacturing has $1,900 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 38 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.)

Personal tax rate

%

b.

Is the answer to (a) reasonable?

	Yes
	No

c.

Suppose the only investment choice is a preferred stock that yields 9 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlsons dividend decision? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Personal tax rate

%

d.

Is this a compelling argument for a low dividend-payout ratio?

	Yes
	No