Use the information for the question(s)below.
Consider the following tax rates:
*The current tax rates are set to expire in 2010 unless Congress extends them.The tax rates shown are for financial assets held for one year.For assets held less than one year,capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket);the same is true for dividends if the assets are held for less than 61 days.
-In 2006,Luther Incorporated paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther has instead retained that cash permanently and invested it into Treasury bills earning 6%,then the present value (PV)of the additional taxes paid by Luther would be closest to:
A)$35 million
B)$290 million
C)$175 million
D)$585 million

Question

Use the information for the question(s)below.
Consider the following tax rates:
  *The current tax rates are set to expire in 2010 unless Congress extends them.The tax rates shown are for financial assets held for one year.For assets held less than one year,capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket);the same is true for dividends if the assets are held for less than 61 days.
-In 2006,Luther Incorporated paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther has instead retained that cash permanently and invested it into Treasury bills earning 6%,then the present value (PV)of the additional taxes paid by Luther would be closest to:
A)$35 million 
B)$290 million 
C)$175 million 
D)$585 million

Quizplus · Accepted Answer

The additional taxes are calculated on the interest earned from the Treasury bills. With $500 million invested at 6%, the annual interest is $30 million. Assuming a corporate tax rate of 35%, the annual tax is $10.5 million. The present value of these taxes, assuming they are paid indefinitely, is $10.5 million / 0.06 = $175 million.

Use the Information for the Question(s)below