Palo Alto Enterprises has $300,000 in cash. They wish to invest the money in Treasury bills at 8% and use the returns to pay dividends to shareholders after a year. Alternatively, they can pay a dividend and allow shareholders to make the investment
If corporate tax rates are 35%, which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options
Answer: A
Business
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