After completing its capital spending for the year, Carlson Manufacturing has $1,700 extra cash. Carlson’s managers...

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Finance

After completing its capital spending for the year, CarlsonManufacturing has $1,700 extra cash. Carlson’s managers must choosebetween investing the cash in Treasury bonds that yield 3 percentor paying the cash out to investors who would invest in the bondsthemselves.

a.
If the corporate tax rate is 22 percent, what personal tax ratewould make the investors equally willing to receive the dividend orto let Carlson invest the money? (Do not round intermediatecalculations and enter your answer as a percent rounded to thenearest whole number, e.g., 32.)


b. Is the answer to (a) reasonable?
Yes
No
c.
Suppose the only investment choice is a preferred stock thatyields 6 percent. The corporate dividend exclusion of 50 percentapplies. What personal tax rate will make the stockholdersindifferent to the outcome of Carlson’s dividend decision?(Do not round intermediate calculations and enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)


d. Is this a compelling argument for a low dividend-payoutratio?
Yes
No

Answer & Explanation Solved by verified expert

4.3 Ratings (779 Votes)

a Let the personal tax rate be x If the company invests in Treasury bonds yielding 3 with corporate tax rate of 22 then the company will earn 17001 3122 This is then paid out in the form of dividend to the investor who gets 1x17001 3122 a If dividends are See Answer

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d.	Is this a compelling argument for a low dividend-payoutratio?

	Yes No