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Redbull holding company has $ 1 0 0 million in cash that it can use for a share repurchase. Suppose instead Redbull invests the funds
Redbull holding company has $ million in cash that it can use for a share repurchase.
Suppose instead Redbull invests the funds in an account paying interest for one year.
a If the corporate tax rate is how much additional cash will Redbull have at the end
of the year net of corporate taxes?
b If investors pay a tax rate on capital gains, by how much will the value of their
shares increase, net of capital gains taxes, after Redbull undertakes the investment?
c If investors pay a tax rate on interest income, how much would they have had if
they invested the $ million on their own?
d Suppose Redbull retained the cash so that it would not need to raise new funds from
outside investors for an expansion it has planned for next year. If it did raise new funds,
it would have to pay issuance fees. How much does Redbull need to save in issuance
fees to make retaining the cash beneficial for its investors? Assume fees can be
expensed for corporate tax purposes.
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