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d'Anconia Copper has $200 million in cash that it can use for a share repurchase.Suppose instead that d'Anconia Copper invests the funds in an account paying 5% interest for one year.Assume that the corporate tax rate is 21%,the individual capital gains rate is 15% and the individual rate on ordinary income is 32%.
-The amount of additional cash that d'Anconia Copper will have at the end of the year net of corporate taxes is closest to:
A)$2.0 million.
B)$5.5 million.
C)$7.9 million.
D)$7.0 million.

Question

Quizplus · Accepted Answer

If d'Anconia Copper invests the $200 million in an account paying 5% interest for one year, they will earn $10 million in interest before taxes. After accounting for the corporate tax rate of 21%, they will have $7.9 million in additional cash at the end of the year. If they instead used the $200 million for a share repurchase, there would be no additional cash earned. Therefore, investing the funds in the account would result in the best choice in terms of additional cash at the end of the year.

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