Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300 million in excess cash. FF can distribute this excess cash as a special dividend. Alternatively, FF can retain this excess cash permanently and invest it in government bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's shareholders pay both capital gains and income taxes; their income tax rate is 50%. The capital gains tax rate at which FF's shareholders are indifferent between the dividend payment and the cash retention is closest to: A) 33% B) 75% C) 37.5% D) 25%
Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300 million in excess cash. FF can distribute this excess cash as a special dividend. Alternatively, FF can retain this excess cash permanently and invest it in government bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's shareholders pay both capital gains and income taxes; their income tax rate is 50%. The capital gains tax rate at which FF's shareholders are indifferent between the dividend payment and the cash retention is closest to: A) 33% B) 75% C) 37.5% D) 25%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Answer is 33%
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Transcribed Image Text:Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300
million in excess cash. FF can distribute this excess cash as a special dividend.
Alternatively, FF can retain this excess cash permanently and invest it in government
bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's
shareholders pay both capital gains and income taxes; their income tax rate is 50%. The
capital gains tax rate at which FF's shareholders are indifferent between the dividend
payment and the cash retention is closest to:
A) 33%
В) 75%
С) 37.5%
D) 25%
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