Question

1) How does the term 'double taxation' apply to corporations? Give an example of double taxation. 2) Why might a company repurchase its own stock?

Answer 1

Question 1:

The term applies to a corporation means that earnings are taxed both at the corporate level and the shareholder level when earnings are distributed in the form of dividends. For example, assume a corporation had taxable income of $100,000 and distributed $50,000 of the earnings to the shareholders as dividends. The corporation would pay tax on $100,000 at corporate income tax rates, and the shareholders would pay tax on $50,000 at their individual income tax rates. Consequently, $50,000 of the income from the corporation would be taxed twice.

Question 2:

Reasons why a company may repurchase its own stock:

- to fund a profit sharing, bonus or stock-option plan
- the stock is selling for a low price and is a good buy
- to stimulate the trading of a company
- to remove shares from the market to avoid a hostile takeover
- to increase reported earnings per share