Palo Alto Enterprises Has $200,000 in Cash

question 4

Multiple Choice

Palo Alto Enterprises has $200,000 in cash. They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. If corporate tax rates are 30%, which option will shareholders prefer in perfect capital markets?

• A) immediate cash dividend
• B) dividend after one year
• C) prefer half from each source
• D) indifferent between options