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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 3 percent or a 5 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 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? Suppose instead that the company pays a $3 million dividend now and the shareholder reinvests the dividend for three years. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?
Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. If the ..
The estimated cash flows for a project are shown below. If the interest rate is 12% per year, compounded annually, the annual worth of the project is
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Kwame owns one share of stock of Fairfax Paint and one share of stock of Litchfield Design. The total value of his holdings is 140 dollars. Both stocks pay annual dividends that are expected to continue forever. What growth rate is expected for Litch..
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Explains what happens to a firm’s break-even point if it is able to lower its fixed operating costs but keeps its variable operating costs per unit constant.
Lucinda has a mortgage loan with an interest rate of 3.9% APR, compounded monthly for 30 years. Her taxes and insurance are $375 per month. Lucinda has an estimate for a contract for $8,500 firm, fixed price to remodel the house and this expense will..
ALC needs to raise $12 million to finance its expansion into new markets and has decided to sell new shares of equity via a general cash offering.
You are evaluating a growing perpetuity product from a large financial services firm. what is the present value of this growing perpetuity?
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