National Business Machine Co. (NBM) has $4 million of extra cash after taxes have been paid....

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National Business Machine Co. (NBM) has $4 million of extra cashafter taxes have been paid. NBM has two choices to make use of thiscash. One alternative is to invest the cash in financial assets.The resulting investment income will be paid out as a specialdividend at the end of three years. In this case, the firm caninvest in Treasury bills yielding 3 percent or a 5 percentpreferred stock. IRS regulations allow the company to exclude fromtaxable income 70 percent of the dividends received from investingin another company’s stock. Another alternative is to pay out thecash now as dividends. This would allow the shareholders to investon their own in Treasury bills with the same yield, or in preferredstock. The corporate tax rate is 34 percent. Assume the investorhas a 30 percent personal income tax rate, which is applied tointerest income and preferred stock dividends. The personaldividend tax rate is 15 percent on common stock dividends.
Suppose the company reinvests the $4 million and pays a dividendin three years.
What is the total aftertax cash flow to shareholders if thecompany invests in T-bills? (Enter your answer in dollars,not millions of dollars, e.g., 1,234,567. Do not round intermediatecalculations and round your final answer to 2 decimal places, e.g.,32.16.)
  Value in three years = 3,605,985.20 ± 0.01%
What is the total aftertax cash flow to shareholders if thecompany invests in preferred stock? (Enter your answer indollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.)
  Value in three years = ?
Suppose instead that the company pays a $4 million dividend nowand the shareholder reinvests the dividend for three years.
What is the total aftertax cash flow to shareholders if theshareholder invests in T-bills? (Enter your answer indollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.)
  Value in three years = 3,618,729.69 ± 0.01%
What is the total aftertax cash flow to shareholders if theshareholder invests in preferred stock? (Enter your answerin dollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.)
  Value in three years = 3,769,640.78 ± 0.01%

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Transcribed Image Text

National Business Machine Co. (NBM) has $4 million of extra cashafter taxes have been paid. NBM has two choices to make use of thiscash. One alternative is to invest the cash in financial assets.The resulting investment income will be paid out as a specialdividend at the end of three years. In this case, the firm caninvest in Treasury bills yielding 3 percent or a 5 percentpreferred stock. IRS regulations allow the company to exclude fromtaxable income 70 percent of the dividends received from investingin another company’s stock. Another alternative is to pay out thecash now as dividends. This would allow the shareholders to investon their own in Treasury bills with the same yield, or in preferredstock. The corporate tax rate is 34 percent. Assume the investorhas a 30 percent personal income tax rate, which is applied tointerest income and preferred stock dividends. The personaldividend tax rate is 15 percent on common stock dividends.Suppose the company reinvests the $4 million and pays a dividendin three years.What is the total aftertax cash flow to shareholders if thecompany invests in T-bills? (Enter your answer in dollars,not millions of dollars, e.g., 1,234,567. Do not round intermediatecalculations and round your final answer to 2 decimal places, e.g.,32.16.) Value in three years = 3,605,985.20 ± 0.01%What is the total aftertax cash flow to shareholders if thecompany invests in preferred stock? (Enter your answer indollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.) Value in three years = ?Suppose instead that the company pays a $4 million dividend nowand the shareholder reinvests the dividend for three years.What is the total aftertax cash flow to shareholders if theshareholder invests in T-bills? (Enter your answer indollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.) Value in three years = 3,618,729.69 ± 0.01%What is the total aftertax cash flow to shareholders if theshareholder invests in preferred stock? (Enter your answerin dollars, not millions of dollars, e.g., 1,234,567. Do not roundintermediate calculations and round your final answer to 2 decimalplaces, e.g., 32.16.) Value in three years = 3,769,640.78 ± 0.01%