Find what the capital gains tax rate

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Problem 1: Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300 million in excess cash. FF can distribute this excess cash as a special dividend. Alternatively, FF can retain this excess cash permanently and invest it in government bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's shareholders pay both capital gains and income taxes; their income tax rate is 50%. The capital gains tax rate at which FF's shareholders are indifferent between the dividend payment and the cash retention is closest to:

A) 75%

B) 25%

C) 33%

D) 37.5%

Reference no: EM132717781

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