Problem
The Rountree ditch-digging firm has $2,000 of extra cash. Brian, the CFO, is thinking about what to do with the money. He can put it into treasuries for three years currently yielding 6 percent or pay it out to shareholders now. Of course, shareholders themselves also have access to the Treasury market. Most of the equity investors in Rountree ditch-digging are poor and pay only a 15 percent personal tax rate. The tax rate on dividends is 18 percent. The corporate tax rate is 32 percent. How much money will shareholders have after three years under each of Brian's alternatives, and what should he do?