Sunshine Travel has earnings of £18 million of which £6 million is available for either investment orshareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a 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, and retail investors. Discuss which decision is best for each group.

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter2: Financial Statements, Cash Flow,and Taxes
Section: Chapter Questions
Problem 12MC
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Sunshine Travel has earnings of £18 million of which £6
million is available for either investment orshareholders.
Sunshine Travel has two options: a) it can invest the £6
million in Treasury bonds at 5 per cent or distribute as a
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, and
retail investors. Discuss which decision is best for each
group.
Transcribed Image Text:Sunshine Travel has earnings of £18 million of which £6 million is available for either investment orshareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a 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, and retail investors. Discuss which decision is best for each group.
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