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

Question

After completing its capital spending for the year. Carlson Manufacturing has $1.400 extra cash. Carlson?s managers must choose between investing the cash in Treasury bonds that yield 4 percent or paying out the cash to investors who would invest in the bonds themselves. a. If the corporate tax rate is 33 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 33 % b. Is the answer to (a) reasonable? Yes No c. Suppose the only investment choice is a preferred stock that yields 7 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? Yes No

Explanation / Answer

a)

Personal rate tax is also 33%.

b)

Yes, it is reasonable.

c)

It would be 23.1%(33*0.7)

d)

yes

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