The shareholder invests in preferred stock

Assignment Help Financial Management

Reference no: EM132041031

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 either 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? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your 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, e.g. 1,234,567. Do not round intermediate calculations and round your 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, e.g. 1,234,567. Do not round intermediate calculations and round your 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, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value in three years $

Reference no: EM132041031

Questions Cloud

What are the implications for nursing : Exploring the concepts of health, why is the way an individual defines health and health problems important? What are the implications for nursing?

Estimate present value of the tax benefits : Estimate the present value of the tax benefits from depreciation.

What is the net amount paid : Assuming that the spot rate in 60 days is $.72, what is the net amount paid, assuming the company wishes to minimize its cost??

What is the maximum one-month loss : ?Treck Co. expects to pay £350,000 in one month for its imports from Northern Ireland. It also expects to receive £325,000 for its exports to Scotland.

The shareholder invests in preferred stock : What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?

How can you more effectively communicate the gospel : How can you more effectively communicate the gospel as something that is not just about a point in time, but also a life that is lived that reflects the gospel?

What are some of the major areas that are covered : Provide an overview of the Code of Ethics that you have chosen. What are some of the major areas that are covered? Why are these important to the profession?

Cash coverage of outstanding debt : Should they be higher given the reduced cash coverage of outstanding debt?

Leadership of amazon executive officers-board of directors : How would you describe the strategy as well as the leadership of amazon's executive officers and board of directors?

User Account

All Pages