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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 4 percent or a 6 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 38 percent. Assume the investor has a 30 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?
What is the total aftertax cash flow to shareholders if the company invests in preferred stock?
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?
What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?
Explains what happens to a firm’s break-even point if it is able to lower its fixed operating costs but keeps its variable operating costs per unit constant.
Assume that the risk-free rate is 2.5% and the expected return on the market is 8%. What is the required rate of return on a stock with a beta of 1.5?
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $180 initially, and then $75 per year in maintenance costs. The discount rate is 13 percent and the tax rate is zero. C..
The closed-loop gain of a negative-feedback amplifier is Af = -80 and the open-loop gain is A = -105. - Find the feedback transfer function β.
The company with the common equity accounts shown here has declared a 4-for-one stock split when the market value of its stock is $33 per share. The firm’s 80-cent per share cash dividend on the new (post split) shares represents an increase of 25 pe..
RAK Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 28,000 1 10,200 2 12,900 3 14,800 4 11,900 5 – 8,400 The company uses a discount rate of 13 percent and a reinvestment rate of 6 percent on all of its projects.
1. Marine Booksellers plans to borrow $2 million for one year at a stated interest rate of 8.00%. The company can either pay quarterly installments to retire the loan or accept a discounted interest loan. Which option should it choose?
One of the common disadvantages of the discounted payback decision rule is that I may cause:
AMR Corp. disclosed the following lease information in its 2011 annual report related to its leasing activities (in millions). Calculate the lease-related liabilities that are potentially missing from AMR’s 2011 balance sheet. What did AMR report on ..
What is an example of a company that uses debt yet still is able to keep their cost of equity down and maximize shareholder value. Be thorough in your analysis and explanations? (Not APPLE).
Sunny's BBQ Company recently issued $50.00 par-value preferred stock that pays an annual dividend of $16.00. Analysts estimate that the stock has a beta of 0.96. The current risk-free rate is 2.00% and the market risk premium (RM - RF) is 8.50%. Assu..
A firm purchases $4,562,500 in goods over a 1 year period from its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50 days. Davis finally chooses to pay on time (pay in the 50th day) but not to take the discount. ..
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