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# 5) Foll Productions has $5 million in (excess) cash, after financing all profitable investment opportunities.

**5) **Foll Productions has $5 million in (excess) cash, after financing all profitable investment opportunities. The CFO of Foll has to decide whether to invest the money in liquid short-term treasury securities at a 7% interest rate, or to issue a dividend of the entire amount now. The corporate tax rate for Foll is 28%. The average investor's personal tax rate is 20%.

**a) **Suppose the firm issues a dividend of the $5 million, and the shareholders choose the same investment (i.e., the T-bond yielding 7%), what is the total after-tax cash inflow next year for the shareholders?

**b) **If instead, the CFO decides to invest the $5 million in that T-Bond, and then issues a dividend next year, what is the after-tax cash inflow next year for the shareholders? What should the CFO do -- should she pay a dividend now or should she reinvest the money now?