Raviv Industries has $100 million in cash that it can use for a share repurchase.
Suppose instead Raviv invests the funds in an account paying 10% interest for one
a. If the corporate tax rate is 40%, how much additional cash will Raviv have at the
end of the year net of corporate taxes?
b. If investors pay a 20% tax rate on capital gains, by how much will the value of
their shares have increased, net of capital gains taxes?
c. If investors pay a 30% tax rate on interest income, how much would they have had
if they invested the $100 million on their own?
d. Suppose Raviv retained the cash so that it would not need to raise new funds from
outside investors for an expansion it has planned for next year. If it did raise new
funds, it would have to pay issuance fees. How much does Raviv need to save in
issuance fees to make retaining the cash beneficial for its investors? (Assume fees
can be expensed for corporate tax purposes.)
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