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National Business Machine Co. (NBM) has $2 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 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 36 percent. Assume the investor has a 32 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 $2 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.)
You have your choice of 3 investments. Investment A is a 15-year annuity that features end of month $1500 payments and has an interest rate of 5.5% compounded monthly. Investment B is a 5 percent continuously compounded lump sum investment also for 1..
CoinBase will generate a cash flow of $220M or $80M if next year the economy is in boom or recession respectively. The capital market is perfect.
The economy is slowing down, not growing and unemployment is going up. If you are on the Federal Reserve Board of Governors what type of policy would you pursue? Please be specific on the tools of monetary policy.
The share price of a stock is 25 today. Calls and puts on the stock have the following quotations. Identify and explain three errors in the quoted option prices.
Credit Losses Based on Accounts Receivable At December 31, Schuler Company had a balance of $369,000 in its Accounts Receivable account.
Seven years ago, Goodwynn & Wolf Incorporated sold a 20 year old bond issue with a 14% annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of r..
Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project
Calculate the real interest rate over the past 24 months using the 30-year Treasury bond rate as the nominal interest rate
Fun Toy Corporation estimates that there is 25% chance of a recession economy next year, a 50% chance of a normal economy next year, and a 25% chance of a boom economy next year. The corporation will exist until the end of next year and then it will ..
Quantity restrictions are equivalent to using a corrective tax. Quantity restrictions with tradable permits are equivalent to using a corrective tax. Mandating equal pollution reductions from all firms is equivalent to using a corrective tax.
What is the maximum profit that the trader can earn by using this strategy?
Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients.
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