The Smith Brothers Pharmaceutical Company has $250,000 in excess cash and is considering two alternatives. One is to pay the extra cash in the form of a dividend to their stockholders. The other is to invest the cash in a Tbill paying 5% interest after tax, and then distribute the cash as a dividend. The firm's stockholders can also invest in the Tbill for the same yield. If the corporate tax rate is 30% and the personal tax rate is 30%, which alternative would you recommend? (Show why!) If the personal tax rate was 40% what should you recommend?

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The Answer of The Smith Brothers Pharmaceutical Company has $250,000 in excess cash and is considering two alternatives. One is to pay the extra cash in the form of a dividend to their stockholders. The other is to invest the cash in a Tbill paying 5% interest after tax, and then distribute the cash as a dividend. The firm's stockholders can also invest in the Tbill for the same yield. If the corporate tax rate is 30% and the personal tax rate is 30%, which alternative would you recommend? (Show why!) If the personal tax rate was 40% what should you recommend?

The Smith Brothers Pharmaceutical Company Has $250,000 in Excess Cash