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Chapter 19 Question 20 Extra cash Treasury bond yield Corporate tax rate b. Preferred stock yield Dividend exclusion rate Output Area: Individual tax...

620 -- S10

After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson's managers must choose between investing the cash in Treasury bonds that yield 8 percent or paying the cash out to investors who would invest in the bonds themselves.

a) If the corporate tax rate is 35 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?

b) Suppose the only investment choice is a preferred stock that yields 12 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson's dividend decisions?

Chapter 19 Question 20 Extra cash $1,000 Treasury bond yield 7% Corporate tax rate 35% b. Preferred stock yield 12% Dividend exclusion rate 70% Output Area: a. Individual tax rate b. Individual tax rate
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Chapter 19
Question 20
Extra cash
Treasury bond yield
Corporate tax rate
b. Preferred stock yield
Dividend exclusion rate $1,000
7%
35%
12%
70% Output Area:
a. Individual tax rate 35.00% b....

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