Dividends versus Reinvestment After completing its capital spending for the year, Carlson Manufacturing has £1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 8 per cent or paying the cash out to investors, who would invest in the bonds themselves.
a. If the corporate tax rate is 28 per cent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money?
b. Is the answer to (a) reasonable? Why or why not?
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