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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?
What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?
calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index.
Building an Income Statement. Fyre, Inc., has sales of $625,000, costs of $ 260,000, depreciation expense of $79,000, interest expense of $43,000, and a tax rate of 35 percent. What is the net income for this firm? Also, calculate operating cash flo..
Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?
Stock X and Stock Z both have an expected return of 10%. The standard deviation of the expected return is 8% for Stock X, and 12% for Stock Z. Assume that these are the only two stocks available in a hypothetical world. What is the expected return an..
Do you believe there are any ethical considerations in slowing payments to your suppliers for the sake of increasing your company's bank balances?
An individual has $15,000 invested in a stock with a beta of 0.4 and another $35,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta?
Bond J has a coupon rate of 5.7 percent. Bond S has a coupon rate of 15.7 percent. Both bonds have ten years to maturity, make semiannual payments, and have a YTM of 12.4 percent. what is the percentage change in the price of these bonds? what is th..
Mr. Jones has a 2-stock portfolio with a total value of $560,000. $225,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 16.80%, Stock B is 10.75%, and correlation between Stock A and Stock B is ..
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $420 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2;..
Dooley, Inc., has outstanding $100 million (par value) bonds that pay an annual coupon rate of interest of 10.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 20 years. What price would the bonds sell for assuming inv..
Would you call a firm that is expected to have a high sales growth rate a growth firm?
Prepare a financial model - Capital cost of product a is 5 crores and initial capital cost of product b is 3 crores. Life of product a is 30 years and life of product b is 10 years.
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