Question
You are the only stockholder of F, which is all equity. Your personal tax rate on dividends is 40%. You must choose between Paying out
You are the only stockholder of F, which is all equity.
Your personal tax rate on dividends is 40%. You must choose between
- Paying out a special dividend for a total amount of $1,000,000. After taxes, you invest this dividend in another firm G that has the same systematic risk as F, share price $1 and pays out a dividend of d every year.
- Investing $1 million in a project P that generates additional EBIT (= operating cash-flows) of $500,000 per year (perpetuity). The after-tax earnings from the project is paid out in dividend every year. F's corporate tax rate TC is 30%.
What is the smallest d such that you prefer (a) to (b)?
Step by Step Solution
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
