National Business Machine Co. (NBM) has $4.3 million of extra cash after taxes have been paid....

70.2K

Verified Solution

Question

Finance

National Business Machine Co. (NBM) has $4.3 million of extracash after taxes have been paid. NBM has two choices to make use ofthis cash. One alternative is to invest the cash in financialassets. The resulting investment income will be paid out as aspecial dividend at the end of three years. In this case, the firmcan invest in either Treasury bills yielding 2.1 percent or a 4.5percent preferred stock. IRS regulations allow the company toexclude from taxable income 50 percent of the dividends receivedfrom investing in another company’s stock. Another alternative isto pay out the cash now as dividends
This would allow the shareholders to invest on their own inTreasury bills with the same yield or in preferred stock. Thecorporate tax rate is 23 percent. Assume the investor has a 33percent personal income tax rate, which is applied to interestincome and preferred stock dividends. The personal dividend taxrate is 20 percent on common stock dividends.
Suppose the company reinvests the $4.3 million andpays a dividend in three years.
a-1.
What is the total aftertax cash flow to shareholders if thecompany invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
a-2. What is the total aftertax cash flow to shareholders if thecompany invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
Suppose instead that the company pays a $4.3million dividend now and the shareholder reinvests the dividend forthree years.
b-1. What is the total aftertax cash flow to shareholders if theshareholder invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
b-2. What is the total aftertax cash flow to shareholders if theshareholder invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)

Answer & Explanation Solved by verified expert

4.2 Ratings (677 Votes)

a1 Extra cash 4300000 Aftertax return on Tbills annual return1corporate tax rate 21123 162 Amount after 3 years 43000001return3 430000011623 451198413 Aftertax cash flow to shareholders amount after 3 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

National Business Machine Co. (NBM) has $4.3 million of extracash after taxes have been paid. NBM has two choices to make use ofthis cash. One alternative is to invest the cash in financialassets. The resulting investment income will be paid out as aspecial dividend at the end of three years. In this case, the firmcan invest in either Treasury bills yielding 2.1 percent or a 4.5percent preferred stock. IRS regulations allow the company toexclude from taxable income 50 percent of the dividends receivedfrom investing in another company’s stock. Another alternative isto pay out the cash now as dividendsThis would allow the shareholders to invest on their own inTreasury bills with the same yield or in preferred stock. Thecorporate tax rate is 23 percent. Assume the investor has a 33percent personal income tax rate, which is applied to interestincome and preferred stock dividends. The personal dividend taxrate is 20 percent on common stock dividends.Suppose the company reinvests the $4.3 million andpays a dividend in three years.a-1.What is the total aftertax cash flow to shareholders if thecompany invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)a-2.What is the total aftertax cash flow to shareholders if thecompany invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)Suppose instead that the company pays a $4.3million dividend now and the shareholder reinvests the dividend forthree years.b-1.What is the total aftertax cash flow to shareholders if theshareholder invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)b-2.What is the total aftertax cash flow to shareholders if theshareholder invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)

Suppose the company reinvests the $4.3 million andpays a dividend in three years.

a-1.	What is the total aftertax cash flow to shareholders if thecompany invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
a-2.	What is the total aftertax cash flow to shareholders if thecompany invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)

Suppose instead that the company pays a $4.3million dividend now and the shareholder reinvests the dividend forthree years.

b-1.	What is the total aftertax cash flow to shareholders if theshareholder invests in T-bills? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
b-2.	What is the total aftertax cash flow to shareholders if theshareholder invests in preferred stock? (Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)