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.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 the immediate cash dividend because the company will have to pay corporate taxes on the returns earned on Treasury bills, reducing the amount available for dividend payments. Additionally, shareholders may have their own investment preferences and may not want to invest in Treasury bills. Therefore, they will prefer to receive the cash dividend immediately.

Palo Alto Enterprises Has $300,000 in Cash