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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 that the company pays a $2 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? (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.)
Determine Lear’s earnings after taxes under this financing plan. The tax rate is 40 percent.
The city of Middleville is considering offering public bus service. Setting up the service will cost the city $1.4M (where M stands for million). The useful life of the buses is 18 years. Annual maintenance of the buses would cost $120,000 per year a..
Profit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 2.3 Return on assets (ROA) 2% Return on equity (ROE) 8% Calculate Haslam's profit margin. Calculate Haslam's liabilities-to-a..
What will be your rate of return if the price of Telecom stock goes up by 10% during the next year?
problemst co. is a closely held corporation incorporated under the laws of the state of delaware with 100 shares of
Assuming a required rate of return of 13%, calculate the equivalent annual cost.
Explain foreign exchange market. Write about all the types of foreign exchange Markets. Explain the participants in foreign exchange markets.
what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?
ACE Co. is considering the purchase of two machines. Machine A costs $100,000 with annual cost of $20,000. It will last for 5 years, and have a salvage value of $5,000 at the end of 5 years. Machine B costs $145,000 with annual costs of $17,500, and ..
Black Gold Oil purchased a parcel of land containing an estimated 2 million barrels of crude oil for $850,000. Two oil wells were drilled at a cost of $340,000. The residual value of the property and equipment is $50,000. Calculate the periodic deple..
What is the guaranteed fair price of a 3-month T-Bill to be delivered at 6 months from now, assume continuous compounding?
Effective annual rate (EAR or EFF%); nominal (quoted) interest rate; APR; periodic rate.
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