Solution-Retaining the cash beneficial

Retaining the cash beneficial

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Reference no: EM133060889

Firm A has 200 million in cash that it can use for share repurchase. Suppose instead that Firm A invests the funds in an account paying 5% interest for 1 year. Corporate tax rate is 35%, individual capital gains rate is 15% and individual rate on ordinary income is 30%.

Firm A retained the 200 million in cash so that it would not need to raise new funds from outside investors for an expansion it has planned for next year. If it did raise new funds, it would have to pay issuance fees. These fees can be expensed for corporate tax purposes, the amount that Firm A needs to save in issuance fees to make retaining the cash beneficial for its investors is closest to:

- 7 mill
- 5 mill
- 2.5 mill
- 2.2 mill

Reference no: EM133060889

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Retaining the cash beneficial

Reference no: EM133060889

Reference no: EM133060889

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