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NBM has $2 million of extra cash. It has two choices to make use of the...

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Finance

NBM has $2 million of extra cash. It has two choices to make useof the cash. One alternative is to invest the cash in financialassets. The resulted investment income will be paid out as aspecial dividend at the end of three years. In this case, the firmcan invest in Treasury bills yielding 7%, or an 11% preferredstock. The tax law says only 30% of the dividend from the preferredstock investment would be subject to the corporate income tax.Another alternative is to pay out the cash as dividends and let theshare holders invest on their own in T-bills with the same yield.The corporate tax rate is 35%, and the individual tax rate is 31%.Should the cash be paid today or in three years? Which of the twooptions generates the highest after-tax income for shareholders?

Please show the calculation. Thank you

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