Michael Can Choose to Hold 500 Shares Trading for $62

question 9

Multiple Choice

Michael can choose to hold 500 shares trading for $62.50 in Company A or 1,000 shares trading in Company B trading for $31.25 each. Both companies announced their earnings on December 31st at $5.00 per share and $2.50 per share, respectively. Company A's payout ratio is 100%. Company B will retain 100% of its earnings this year. Next year it will return to its usual 100% payout ratio. (Company B's common share dividend is not cumulative) . Both companies return 8% to their common shareholders. Michael will by bonds with any cash received from dividends, providing an interest income at 8%. He faces a marginal income tax rate of 40% and a dividend tax rate of 37%. Assuming Michael does not liquidate his investments, which company will provide him the higher after tax income at the end of the second year?

• A) Company B provides $50.40 more income.
• B) Company A provides $75.60 more income.
• C) Company A provides $162.00 more income.
• D) Company B provides $1,175.40 more income.
• E) Company B provides $6.00 more income.

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Definitions:

Delinquency

Noncompliant behavior, typically of a minor, that is considered wrong according to legal or moral guidelines, often including acts like vandalism, theft, or truancy.

Bankruptcy

A legal process through which individuals or businesses unable to meet their financial obligations can seek relief from some or all of their debts.

National Deficit

The financial situation in which a government's expenditures surpass its revenues, leading to borrowing and debt accumulation.

Passing of Wind

The discharge of intestinal gas from the rectum, a natural, although often socially embarrassing, physiological process.