15. Dividends versus Reinvestment [LO2] National Business Machine Co. Py. has $4 million of extra cash after taxes have been paid. NBM has two choies make use of this cash. One alternative is invest the cash in financial assets T resulting investment income will be paid out as a special dividend at the end of thre In this case, the firm can invest in Treasury bills yielding 2.5 percent or in 4.3 percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income 70 percent of the dividends received from investing in another company's stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield, or in preferred stock. The corporate tax rate is 21 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. Also assume the personal dividend tax rate is 15 pereent on common stock dividends. Should the cash be paid today or in three years
