After completing its capital spending for the year, Carlson Manufacturing has $2

Question

After completing its capital spending for the year, Carlson Manufacturing has $2,100 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 7 percent or paying the cash out to investors who would invest in the bonds themselves.

If the corporate tax rate is 40 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 the nearest whole number, e.g., 32.)

Suppose the only investment choice is a preferred stock that yields 11 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.)

No

Please, help me to solve this question. Im posting it the 3rd time already

After completing its capital spending for the year, Carlson Manufacturing has $2,100 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 7 percent or paying the cash out to investors who would invest in the bonds themselves.

Explanation / Answer

a. If the personal tax would be equal to the corporate tax rate then it will make the investors equally willing to receive the dividend or to let Carlson invest the money. Therefore, Personal tax rate = 40%

b. Yes, Answer in (a) is reasonable.

c. The interest company is earning = 2100*11% = $231
Tax which the company has to pay = 231*(1-0.70)*40% = $27.72
Indifferent Personal Tax rate is = 27.72*100/231 = 12%

d. No, it is an undeniable argument. But there are some legal constraints. Which deter the firms from investing large sums of other companies.

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