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

Question

After completing its capital spending for the year, Carlson Manufacturing has $1,100 extra cash. Carlson's managers must choose between investing the cash in Treasury bonds that yield 6 percent or paying the cash out to investors who would invest in the bonds themselves. Required: (a) 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? (Round your answer to 2 decimal places.) Personal tax rate:

Explanation / Answer

if invested in treasury coupon payments = 1100*0.06 = $66 from preferred stock revenue = 1100*0.07*0.7 + 1100*0.07*0.3(1-t) = 53.9+ 23.1(1-t) for investor to be indifferent 66 = 53.9+23.1(1-t) then t = 47.6%

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