After completing its capital spending for the year, Carlson Manufacturing has $1

Question

After completing its capital spending for the year, Carlson Manufacturing has $1,200 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 6 percent or paying out the cash to investors who would invest in the bonds themselves. a. If the corporate tax rate is 31 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Personal tax rate % b. Is the answer to (a) reasonable? Yes No c. Suppose the only investment choice is a preferred stock that yields 9 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 decision? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Personal tax rate % d. Is this a compelling argument for a low dividend-payout ratio?

Explanation / Answer

Answer:a Investors equally willing to receive dividend or let Carlson invest the money if the Personal tax rate is equal to 31%, because in that rate, investors will get the same amount of money as if the company exercise the investment by themselves.

Answer:b It is reasonable, because if personal tax rate is equal to income tax rate, investors and the company will generate the same amount of income.

Answer:c If the 70% tax exclusion applies, the stockholders will be indifferent to the outcome ofCarlson's dividend decision if the personal tax rate is equal to 30% more, because if the rate is more than 30%, taxable income, the taxable income for personal is higher than corporate taxable income.

Answer:d Yes, because low dividend payout ratio means low taxable income, or investor could choose not to take the dividend payment from the company.

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