Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, an retail investors. Discuss which decision is best for each group. b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, an retail investors. Discuss which decision is best for each group. b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
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