Question

After completing its capital spending for the year, Carlson Manufacturing has $2,800 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 4 percent or paying the cash out to investors who would invest in the bonds themselves.

  

a.	If the corporate tax rate is 23 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?

b.	Is the answer to (a) reasonable?
	Yes No

c.	Suppose the only investment choice is a preferred stock that yields 7 percent. The corporate dividend exclusion of 50 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision?
d.	Is this a compelling argument for a low dividend-payout ratio?
	Yes No

Answer 1