08 May HOW MUCH DOES RAVIV NEED TO SAVE IN ISSUANCE FEES TO MAKE RETAINING THE CASH BENEFICIAL FOR ITS INVESTORS?
Value of their sharesRaviv 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 year.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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