Question

Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point of view, how should a firm spend its excess cash once it has funded all positive net present value projects

Answer 1

Answer: e. repurchase shares

Explanation:

If the personal tax rates are lower than corporate tax rates then the company should engage in an activity that would put money into the pockets of shareholders such that they would take advantage of the lower personal tax rates.

The best way to do that would be a share repurchase. The company would probably buy at above market rates which would give shareholders capital gain and they wouldn't have to pay much taxes on it as personal rates are lower.