What is the total aftertax cash flow to shareholders

Assignment Help Financial Management

Reference no: EM131972370

National Business Machine Co. (NBM) has $9 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 2 percent or a 4 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 35 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 20 percent on common stock dividends.

Suppose the company reinvests the $9 million and pays a dividend in three years.

A. 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 final answer to 2 decimal places, e.g., 32.16.)

Value in three years $

B. 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 final answer to 2 decimal places, e.g., 32.16.)

Value in three years $

Suppose instead that the company pays a $9 million dividend now and the shareholder reinvests the dividend for three years.

C. 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 final answer to 2 decimal places, e.g., 32.16.)

Value in three years $

D. 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 final answer to 2 decimal places, e.g., 32.16.)

Value in three years $

Reference no: EM131972370

Questions Cloud

What annual rate of return did you realize : You deposited $900 in a mutual fund each year for the past seven years. Your account balance is $8000. What annual rate of return did you realize?

Economic rationale for the existence of mutual funds : Discuss the economic rationale for the existence of mutual funds, What roles do they play for investors.

Explain negative reinforcement and punishment : What are transcendence needs and how might these needs influence supervisor behavior. Explain negative reinforcement and punishment.

Estimate beta of unlevered firm in commuter airline business : Estimate the beta of an unlevered firm in the commuter airline business based on Jaxair's market-determined beta.

What is the total aftertax cash flow to shareholders : What is the total aftertax cash flow to shareholders if the company invests in T-bills?

What is the present value of this liability : If the relevant discount rate is 6 percent, what is the present value of this liability?

The stated and expected yields to maturity of the bonds : The firm can handle these lower payments. What are the stated and expected yields to maturity of the bonds?

What will the expected rate of return on the portfolio be : Consider a risky portfolio. What will the expected rate of return on the portfolio be?

What are the company current liabilities : The Fairfield Company has total assets of $73,360, fixed assets of $40,800, What are the company's current liabilities?

User Account

All Pages