Palo Alto Enterprises has $100,000 in cash.They wish to invest the money in Treasury bills at 6% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.If corporate tax rates are 35%,which option will shareholders prefer?

Question

Quizplus · Accepted Answer

Shareholders will prefer an immediate cash dividend because they can invest the money themselves and avoid the corporate tax on the interest income that Palo Alto Enterprises would incur if it invested the money.

Palo Alto Enterprises Has $100,000 in Cash