Vijay National Business Machine Co. (NBM) has $4.1 million of extra cash after taxes havebeen paid. NBM has two choices to make use of this cash. One alternative is to investthe cash in financial assets. The resulting investment income will be paid out as a specialdividend at the end of three years. In this case, the firm can invest in either Treasury billsyielding 1.9 percent or a 4.3 percent preferred stock. IRS regulations allow the companyto exclude from taxable income 50 percent of the dividends received from investing inanother 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 sameyield or in preferred stock. The corporate tax rate is 21 percent. Assume the investor hasa 28 percent personal income tax rate, which is applied to interest income and preferredstock dividends. The personal dividend tax rate is 10 percent on common stockdividends.Suppose the company reinvests the $4.1 million and pays a dividend in three years.a-1. What is the total aftertax cash flow to shareholders if the company invests in T-bills?(Do not round intermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)a-2. What is the total aftertax cash flow to shareholders if the company invests inpreferred stock? (Do not round intermediate calculations and enter your answer indollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)a-1. Value in three yearsa-2. Value in three years

A company has surplus fund that it can invest to earn interest income or dividends. The same can…

Answered: National Business Machine Co. (NBM) has…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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please help with part D!!! National Business Machine Company (NBM) has $5.4 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 3.2 percent or a 5.6 percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income 50 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 24 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock…
Antonio Melton, the chief executive officer of Rooney Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $401,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $84,000 Year 2 $99,000 Year 3 $130,000 Year 4 $184,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible.…
Antonio Melton, the chief executive officer of Gibson Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $401,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 504,000 Year 2 $99,000 Year 3 $123,000 Year 4 $194,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Meliton approve the project?
Antonio Melton, the chief executive officer of Finch Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $417,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $91,000 Year 2 $101,000 Year 3 $123,000 Year 4 $191,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 12 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…
Antonio Melton, the chief executive officer of Solomon Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $418,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $86,000 Year 2 $97,000 Year 3 $122,000 Year 4 $186,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…
PQR Corporation is considering the following alternative plans of financing for raising$4,000,000: The following additional information is available for PQR Corporation: Earnings before bond interest and income taxes (EBIT) are $9,000,000. The tax rate is 35%. All bonds or stocks are issued at their par values. Interest is payable at the end of each year. Required: Which plan should company choose & why (i.e. Explain the rationale behind selecting the plan)? Provide all the detailed calculations.
Antonio Melton, the chief executive officer of Thornton Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $407,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 Year 3 Year 2 $100,000 Year 4 $190,000 $ 90,000 $127,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…
Antonio Melton, the chief executive officer of Melton Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $500,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $105,000 Year 2 $120,000 Year 3 $150,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 7 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Year 4. $225,000 Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…
Antonio Melton, the chief executive officer of Melton Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $500,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 Year 2 Year 3 Year 4 $105,000 $120,000 $150,000 $225,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 7 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible.…
Antonio Melton, the chief executive officer of Benson Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $404,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax Year 1 $92,000 Year 2 $102,000 Year 3 $130,000 Year 4 $192,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 12 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? A b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…
Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $34 million gaming center: a. Issue $34 million of 6% bonds at face amount.b. Issue 1 million shares of common stock for $34 per share. 1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answer in dollars, not millions. (i.e., $5.5 million should be entered as 5,500,000). Round your "Earnings per Share" to 2 decimal places. Round your "Earnings per Share" to 2 decimal places.) Issue Bonds Issue stock Operating income 10,900,000 10,900,000 Interest expense (bonds only) Income before tax Income tax expense (40%) Net Income Number of shares 3,900,000 4,900,000 Earnings per share
Intella's current assets total to $20 million versus $10 million of current liabilities, while AWD's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? OA. The transactions would improve Intella's financial strength as measured by its current ratio but lower AWD's current ratio. O B. The transactions would lower Intella's financial strength as measured by its current ratio but raise AWD's current ratio. O C. The transactions would have no effect on the firm' financial strength as measured by their current ratios. O D. The transactions would lower both firm' financial strength as measured by their current ratios. O E. The transactions would improve both firms' financial…

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