Michael Can Choose to Hold 500 Shares Trading for $62

Multiple Choice

Michael can choose to hold 500 shares trading for $62.50 in Company A or 1,000 shares trading in Company B trading for $31.25 each. Both companies announced their earnings on December 31st at $5.00 per share and $2.50 per share, respectively. Company A's payout ratio is 100%. Company B will retain 100% of its earnings this year. Next year it will return to its usual 100% payout ratio. (Company B's common share dividend is not cumulative) . Both companies return 8% to their common shareholders. Michael will by bonds with any cash received from dividends, providing an interest income at 8%. He faces a marginal income tax rate of 40% and a dividend tax rate of 37%. Assuming Michael does not liquidate his investments, which company will provide him the higher after tax income at the end of the second year?

A) Company B provides $50.40 more income.
B) Company A provides $75.60 more income.
C) Company A provides $162.00 more income.
D) Company B provides $1,175.40 more income.
E) Company B provides $6.00 more income.