Question

After completing its capital spending for the year, Carlson Manufacturing has $2,400 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 32 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?

  

Personal tax rate

%

  

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

  

c.

Suppose the only investment choice is a preferred stock that yields 10 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

Personal tax rate

%

    

d.	Is this a compelling argument for a low dividend-payout ratio?
	Yes No

Answer 1