1.       After completing its capital spending for the year,...

1.       After completing its capital spending for the year, Company X has $1,000 of extra cash. Company X managers must choose between investing the cash in Treasury bonds that yield 7% or paying the cash out to investors who would invest in bond themselves.

a.       If the corporate tax rate is 21%, what personal tax rate would make the investors equally willing to receive the dividend or to let Company X invest the money?

b.       Suppose the only investment choice is a preferred stock that yields 12%. The corporate dividend exclusion of 70% applies (70 percent of income from stock is exempt from corporate taxes). What personal rax rate will make the investor indifferent to the outcome fo Company X dividend decision?

c.       Is the compelling argument for a low dividend payout ratio? Why or why not?