Paying cash out to investors who would invest in the bonds

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Reference no: EM131869187

Having completing its capital spending for the year, Newcaste Ayl has 1,000 extra cash. Two cash distribution strategies are available:

(1) Retain the cash for the purpose of investing in Treasury bonds yielding 8% with the annual returns subsequently distributed to investors as a dividend, or

(2) Paying the cash out to investors who would invest in the bonds themselves.

Problem

Assume that Newcaste Ayl’s tax rate is 23% (0.23). If the investor tax rate on dividend payments and interest income is 20%, what is investors’ after-tax cash flow if Newcastle Ayl applies cash distribution strategy 2? State your answer rounded off to two decimal points.

Reference no: EM131869187

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