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The Akins ditch-digging firm has $2,000 of extra cash. Brian, the CFO, is thinking about what to do with the money.
The Akins ditch-digging firm has $2,000 of extra cash. Brian, the CFO, is thinking about what to
do with the money. He can put it into treasuries for three years currently yielding 6% or pay it
out to shareholders now. Of course, shareholders themselves also have access to the treasury
market. Most of the equity investors in Rountree ditch-digging are poor and pay only a 15%
personal tax rate. The maximum tax rate on dividends is 18%. The corporate tax rate is 32%.
How much money will shareholders have after 3 years under each of Brian's alternatives and
what should he do?