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After completing its capital spending for the year, Carlson Manufacturing has $2,400 extra cash. Carlson’s managers...

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Accounting

After completing its capital spending for the year, CarlsonManufacturing has $2,400 extra cash. Carlson’s managers must choosebetween investing the cash in Treasury bonds that yield 4 percentor paying the cash out to investors who would invest in the bondsthemselves.

  

a.

If the corporate tax rate is 32 percent, what personal tax ratewould make the investors equally willing to receive the dividend orto let Carlson invest the money?

  

  Personal tax rate

%

  

b.

Is the answer to (a) reasonable?

Yes

No

  

c.

Suppose the only investment choice is a preferred stock thatyields 10 percent. The corporate dividend exclusion of 70 percentapplies. What personal tax rate will make the stockholdersindifferent to the outcome of Carlson’s dividend decision?(Do not round intermediate calculations and round yourfinal answer to 2 decimal places. (e.g., 32.16))

  

  Personal tax rate

%

    

d.

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

Yes

No

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