You are a shareholder in a corporation. The corporation earns $3 per share before taxes. Once it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 36%, the personal tax rate on dividend income is 35% and the personal tax rate on other income is 45%.
How much is left for you after all taxes are paid? (Round to the nearest cent)
Dividend Versus Capital Tax Gain :
A firm can distribute residual earnings as dividends to shareholders or reinvest the earnings to increase future earnings. Dividend incomes to shareholders are generally taxed at a higher rate than capital gains income.
Answer and Explanation:
We first compute the amount of dividend payment per share, after deducting the corporate income tax, which is:
- dividend per share = 3 *(1 - 36%)
- dividend per share = 1.92
Since dividend income is taxed at the rate of 35%, the amount you receive after tax is:
- 1.92 *(1 - 35%) = 1.248
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10