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National Business Machine Co. (NBM) has $3 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 percent or a 5 percent preferred stock. IRS regulations allow the company to exclude from taxable income 70 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 35 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 $3 million and pays a dividend in three years. What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value in three years $ What is the total aftertax cash flow to shareholders if the company invests in preferred stock? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value in three years $ Suppose instead that the company pays a $3 million dividend now and the shareholder reinvests the dividend for three years. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value in three years $ What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value in three years $
MassNet Corporation has 5.50 million shares outstanding and debt with interest payments of $1.27 million. What earnings before interest and tax (EBIT) must the firm have if it were to provide $3per share to the shareholders? Assume perfect markets.
In the hope of high returns, venture capitalists provide funds to finance new companies. However, potential competitors and structures of the market into which the new firm enters are extremely important in realization of profits.
Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom .15 .10 .35 .52 Normal .52 .18 .20 .28 Bust .33 .19 –.19 –.3..
Your firm is contemplating the purchase of a new $660,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $51,000 at the end of that time. If the tax rate is 40 percent,..
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset falls into the three-year MACRS class. The tax rate is 35 percent and the required return i..
Calculate the weighted cost of capital for a firm using the book value of the components and the concepts presented in this phase - determine the percentage of the firm''s assets that are currently be financed with debt (total liabilities), preferr..
Williams & Sons last year reported sales of $7 million and an inventory turnover ratio of 3.5. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnov..
Pricing is a critical decision made by a marketing executive because price has a direct effect on a firm’s profits. Note the six major steps in the process organizations go through in setting prices on pages 322–323. Step one involves identifying pri..
The following financial information is available on Rawls Manufacturing Company: Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (compu..
The management of Pitsos Ltd is considering the following two investments. The returns of these new projects depend on the state of the economy and they are shown below.
Present and future values for different interest rates-Find the following values. Compounding/discounting occurs annually. An initial $700 compounded for 10 years at 8%.
A company considers a new project with similar risk to its existing business. The company estimates the project requires an investment, I = $100 million, and will generate a perpetual annual cash flow, EBIT = $20 million. Suppose the company proposes..
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