National Business Machine Company (NBM) has $4.2 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 2 percent or a 4.4 percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income 50 percent of the dividends received from investing in another company's 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 22 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock dividends. Suppose the company reinvests the $4.2 million and pays a dividend in three years. a. What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Do not round intermediate calculations and enter you answer in ollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) a. Value in three years b. Value in three years $ 5,094,098.04 Suppose instead that the company pays a $4.2 million dividend now and the shareholder reinvests the dividend for three years. c. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) d. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) c. Value in three years d. Value in three years
National Business Machine Company (NBM) has $4.2 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 2 percent or a 4.4 percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income 50 percent of the dividends received from investing in another company's 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 22 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock dividends. Suppose the company reinvests the $4.2 million and pays a dividend in three years. a. What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Do not round intermediate calculations and enter you answer in ollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) a. Value in three years b. Value in three years $ 5,094,098.04 Suppose instead that the company pays a $4.2 million dividend now and the shareholder reinvests the dividend for three years. c. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) d. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Do not round intermediate calculations and enter you answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) c. Value in three years d. Value in three years
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
Related questions
Question
Chapter 17 Q 6
Transcribed Image Text:National Business Machine Company (NBM) has $4.2 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 2 percent or a 4.4 percent preferred stock. Assume IRS regulations allow
the company to exclude from taxable income 50 percent of the dividends received from
investing in another company's 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 22 percent. Assume the
investor has a 31 percent personal income tax rate, which is applied to interest income
and preferred stock dividends. The personal dividend tax rate is 15 percent on common
stock dividends.
Suppose the company reinvests the $4.2 million and pays a dividend in three years.
a. What is the total aftertax cash flow to shareholders if the company invests in T-bills?
(Do not round intermediate calculations and enter you answer in dollars, not
millions, rounded to 2 decimal places, e.g., 1,234,567.89.)
b. What is the total aftertax cash flow to shareholders if the company invests in preferred
stock? (Do not round intermediate calculations and enter you answer in dollars, not
millions, rounded to decimal places, e.g., 1,234,567.89.)
a. Value in three years
b. Value in three years
$
5,094,098.04
Suppose instead that the company pays a $4.2 million dividend now and the
shareholder reinvests the dividend for three years.
c. Value in three years
d. Value in three years
c. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills?
(Do not round intermediate calculations and enter you answer in dollars, not
millions, rounded to 2 decimal places, e.g., 1,234,567.89.)
d. What is the total aftertax cash flow to shareholders if the shareholder invests in
preferred stock? (Do not round intermediate calculations and enter you answer in
dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.)
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