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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 -- S10After 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? Is this answer reasonable? Why or why not?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?c) Is this a compelling argument for a low dividend payout ration? Why or why not?See the attached template.
