NBM has $2 million of extra cash. It has two choices to make use of the...

NBM has $2 million of extra cash. It has two choices to make use of the cash. One alternative is to invest the cash in financial assets. The resulted 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 7%, or an 11% preferred stock. The tax law says only 30% of the dividend from the preferred stock investment would be subject to the corporate income tax. Another alternative is to pay out the cash as dividends and let the share holders invest on their own in T-bills with the same yield. The corporate tax rate is 35%, and the individual tax rate is 31%. Should the cash be paid today or in three years? Which of the two options generates the highest after-tax income for share holders?

Please show the calculation. Thank you

Expert Solution

jeff jeffy answered 3 months ago

MIDSTRATA Co. has $3 million of extra cash after taxes have been paid. It has two choices to make use of this cash.

MIDSTRATA Co. has $3 million of extra cash after taxes have been paid. It has two choices to make use of this cash. First 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 3% or a 5% preferred stock. CRA regulations allow the company to exclude from taxable income 100% of...

National Business Machine Co. (NBM) has $2 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $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 percent preferred stock. IRS regulations allow the company to exclude...

National Business Machine Co. (NBM) has $4 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $4 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 2.5 percent or in 4.3 percent preferred stock. IRS regulations allow the company to exclude...

National Business Machine Co. (NBM) has $5.5 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $5.5 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 3.3 percent or a 5.7 percent preferred stock. IRS regulations allow the company to exclude...

National Business Machine Co. (NBM) has $4.7 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $4.7 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 either Treasury bills yielding 2.5 percent or a 4.9 percent preferred stock. IRS regulations allow the company to...

National Business Machine Co. (NBM) has $4.9 million of extra cash after taxes have been paid....

National Business Machine Co. (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 either Treasury bills yielding 3% or 5% preferred stock. IRS regulations allow the company to exclude from taxable...

National Business Machine Co. (NBM) has $9 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $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 either Treasury bills yielding 3 percent or a 5 percent preferred stock. IRS regulations allow the company to...

National Business Machine Co. (NBM) has $5.4 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $5.4 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 either Treasury bills yielding 3.2 percent or a 5.6 percent preferred stock. IRS regulations allow the company to...

National Business Machine Co. (NBM) has $5.7 million of extra cash after taxes have been paid....

National Business Machine Co. (NBM) has $5.7 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 either Treasury bills yielding 3.5 percent or a 5.9 percent preferred stock. IRS regulations allow the company to...

National Business Machine Co. (NBM) has $4.2 million of extra cash after taxes have been paid....

National Business Machine Co. (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. IRS regulations allow the company to exclude...

Question