National Business Machine Company (NBM) has $4.9 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 2.7 percent or in 5.1 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 24 percent. Assume the investor has a 28 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 20 percent on common stock dividends. ▸ Suppose the company reinvests the $4.9 million and pays a dividend in three years. a-1. What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-2. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-1. Value in three years a-2. Value in three years a-2. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-1. Value in three years a-2. Value in three years Suppose instead that the company pays a $4.9 million dividend now and the shareholder reinvests the dividend for three years. b-1. What is the total aftertax cash flow to shareholders if the shareholder invests in T- bills? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.. 1,234,567.89.) b-2. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. Value in three years b-2. 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
icon
Related questions
Question

Ee.90.

 

National Business Machine Company (NBM) has $4.9 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 2.7 percent or in 5.1 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 24 percent. Assume the
investor has a 28 percent personal income tax rate, which is applied to interest income
and preferred stock dividends. The personal dividend tax rate is 20 percent on common
stock dividends.
Suppose the company reinvests the $4.9 million and pays a dividend in three years.
a-1. What is the total aftertax cash flow to shareholders if the company invests in T-bills?
(Do not round intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
a-2. What is the total aftertax cash flow to shareholders if the company invests in
preferred stock? (Do not round intermediate calculations and enter your answer
in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
a-1. Value in three years
a-2. Value in three years
a-2. What is the total aftertax cash flow to shareholders if the company invests in
preferred stock? (Do not round intermediate calculations and enter your answer
in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
a-1. Value in three years
a-2. Value in three years
Suppose instead that the company pays a $4.9 million dividend now and the
shareholder reinvests the dividend for three years.
b-1. What is the total aftertax cash flow to shareholders if the shareholder invests in T-
bills? (Do not round intermediate calculations and enter your answer in dollars,
not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
b-2. What is the total aftertax cash flow to shareholders if the shareholder invests in
preferred stock? (Do not round intermediate calculations and enter your answer
in dollars, not millions of dollars, rounded to 2 decimal places, e.g..
1,234,567.89.)
b-1. Value in three years
b-2. Value in three years
Transcribed Image Text:National Business Machine Company (NBM) has $4.9 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 2.7 percent or in 5.1 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 24 percent. Assume the investor has a 28 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 20 percent on common stock dividends. Suppose the company reinvests the $4.9 million and pays a dividend in three years. a-1. What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-2. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-1. Value in three years a-2. Value in three years a-2. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) a-1. Value in three years a-2. Value in three years Suppose instead that the company pays a $4.9 million dividend now and the shareholder reinvests the dividend for three years. b-1. What is the total aftertax cash flow to shareholders if the shareholder invests in T- bills? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b-2. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.. 1,234,567.89.) b-1. Value in three years b-2. Value in three years
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 7 steps

Blurred answer
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education