
CHAPTER 17 B-299
d. With this tax policy, we simply need to multiply the personal tax rate times one minus the dividend
exemption percentage, so:
e. Since different investors have widely varying tax rates on ordinary income and capital gains,
15. Since the $2,000,000 cash is after corporate tax, the full amount will be invested. So, the value of each
alternative is:
Alternative 1:
The firm invests in T-bills or in preferred stock, and then pays out as special dividend in 3 years
If the firm invests in T-Bills:
If the firm invests in T-bills, the aftertax yield of the T-bills will be:
Aftertax corporate yield = .05(1 – .35)
Aftertax corporate yield = .0325 or 3.25%
So, the future value of the corporate investment in T-bills will be:
FV of investment in T-bills = $2,000,000(1 + .0325)3
FV of investment in T-bills = $2,201,406.16
Since the future value will be paid to shareholders as a dividend, the aftertax cash flow will be:
Aftertax cash flow to shareholders = $2,201,406.16(1 – .15)
Aftertax cash flow to shareholders = $1,871,195.23