Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300 million in excess cash. FF can distribute this excess cash as a special dividend. Alternatively, FF can retain this excess cash permanently and invest it in government bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's shareholders pay both capital gains and income taxes; their income tax rate is 50%. The capital gains tax rate at which FF's shareholders are indifferent between the dividend payment and the cash retention is closest to: A) 33% B) 75% C) 37.5% D) 25%
Assume a Modigliani and Miller (MM) world with taxes. Food Feast Ltd (FF) has €300 million in excess cash. FF can distribute this excess cash as a special dividend. Alternatively, FF can retain this excess cash permanently and invest it in government bonds earning a 1.5% annual return. FF pays a corporate tax rate of 25%. FF's shareholders pay both capital gains and income taxes; their income tax rate is 50%. The capital gains tax rate at which FF's shareholders are indifferent between the dividend payment and the cash retention is closest to: A) 33% B) 75% C) 37.5% D) 25%
Chapter3: Organizing And Financing A New Venture
Section: Chapter Questions
Problem 7EP
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