Use the information for the question(s)below.
Consider the following tax rates:

-In 2006,Luther Incorporated paid a special dividend of $5 per share for the 1 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:

Question

Use the information for the question(s)below.
Consider the following tax rates:
 
-In 2006,Luther Incorporated paid a special dividend of $5 per share for the 1 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:

Quizplus · Accepted Answer

The additional taxes that Luther would have to pay on the special dividend can be calculated as follows:
1 million shares x $5 dividend per share = $5 million total dividend
Dividend tax rate = 15%
Additional taxes = $5 million x 15% = $750,000
To calculate the PV of the additional taxes, we need to discount it at the rate of 6%, the rate at which the cash could have been invested. Using the PV formula, we get:
PV = $750,000 / (1 + 0.06) = $707,547.17 ≈ $1.75 million
Therefore, the closest answer choice is C) $1.75 million.

Use the Information for the Question(s)below