Money, Inc., a U.S. corporation, has $500,000 to invest overseas. For U.S. tax purposes, any additional gross income earned by Money will be taxed at 34%. Two possibilities for investment are:
a. Invest the $500,000 in common stock of Exco (a foreign corporation). Exco common stock pays a dividend of $3 per share each year. The $500,000 would purchase 10,000 shares (or 10%) of Exco’s only class of stock (voting common).
Exco expects to earn $10 million before taxes this year and to be taxed at a flat rate of 40%. Its current E & P before taxes is estimated to be $9.4 million. Exco’s government does not withhold on dividends paid to foreign investors.
b. Invest the $500,000 in Exco bonds that pay interest at 7% per year. Assume that the bonds will be acquired at par, or face, value. Exco’s government withholds 25% on interest paid to foreign investors.
Analyze these two investment opportunities, and determine which would give Money the better return after taxes. Make sure you consider the effect of the FTC.
Write a letter to Money’s CFO Jeffrey Howard, advising the corporation of your findings. Money’s address is 9201 West South Street, Woodstock IL 60098.