Question

How do I figure out the net investment income? I figured the ordinary income at (173,434,000*34%)...

How do I figure out the net investment income?

I figured the ordinary income at (173,434,000*34%) 58,967,560 [treating it as a dividend] and capital gains at (120,358,400*20%) 24,071,680 [treating it as the exchange].

Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption. You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you.

Using the applicable tax rates provided below, compute your after-tax savings if the redemption is treated as an exchange as opposed to a dividend distribution. Any dividend income amounts should be considered ordinary income in character.

For purposes of the after-tax savings calculation, you should assume you are liable for the net investment income tax on both capital gains and dividend income.

Applicable tax rates:

Individual - ordinary income - 34%

Individual - long-term capital gains - 20%

Individual - net investment income 3.8%

Homework Answers

Answer #1
Computation of after tax savings
Particular Treating as exchange Desription Treating as dividend distribution Desription
(1) Total consideration $173,434,000 $173,434,000
(2) Less: purchase cost (2,653,780 x 20) $53,075,600
(3) Capital gain $120,358,400
(4) Taxes
       Ordinary income tax $58,967,560 (1) x 34%
       Long term capital gain tax $24,071,680 (3) x 20%
       net investmentment income tax $4,573,619 (3) x 3.8% $6,590,492 (1) x 3.8%
      Total taxes $28,645,299 $65,558,052
After tax savings $91,713,101 (3) - (4) $107,875,948 (1) - (4)
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
answer all questions please Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders...
answer all questions please Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption. You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you....
Individual taxpayers prefer capital gain income and ordinary losses because capital gains are taxed at lower...
Individual taxpayers prefer capital gain income and ordinary losses because capital gains are taxed at lower tax rates and ordinary losses are not limited to net $3,000 per year like net capital losses are. True False
Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a...
Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a $24,900 net long-term capital gain and $37,600 business income from a passive activity. Use Individual tax rate schedules and Tax rates for capital gains and qualified dividends. Compute Mr. Erwin’s income tax on the $62,500 investment income from these two sources. Compute Mr. Erwin’s Medicare contribution tax if the $62,500 is his net investment income for the year. What is Mr. Erwin’s marginal tax...
Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a...
Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a $24,900 net long-term capital gain and $37,600 business income from a passive activity. Use Individual tax rate schedules and Tax rates for capital gains and qualified dividends. Compute Mr. Erwin’s income tax on the $62,500 investment income from these two sources. Compute Mr. Erwin’s Medicare contribution tax if the $62,500 is his net investment income for the year. What is Mr. Erwin’s marginal tax...
Henrich is a single taxpayer. In 2018, his taxable income is $453,500. What is his income...
Henrich is a single taxpayer. In 2018, his taxable income is $453,500. What is his income tax and net investment income tax liability in each of the following alternative scenarios? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates, Estates and Trusts for reference. (Do not round intermediate calculations. Round your answer to 2 decimal places. Leave no answer blank. Enter zero if applicable.) c. His $453,500 of taxable income includes $46,000 of long-term capital gain that is taxed...
A company has a retention ratio of 65%, net income of $85 million, and 12 million...
A company has a retention ratio of 65%, net income of $85 million, and 12 million shares outstanding. How much should an investor pay now for a stock expected to sell for $60 one year from now if dividends are taxed at 40%, capital gains are taxed at 20%, and a 22% after-tax return is expected on the investment?
Common stock is considered to be one of the most popular investment vehicles for long-term wealth...
Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective. Two years ago, David purchased 100 shares of a particular company's stock as a price of $107.69 per share. Last year, David received an annual dividend of $1.50 per share, and...
Barry and Liz, both under age 65, file a joint tax return for their 2019 tax...
Barry and Liz, both under age 65, file a joint tax return for their 2019 tax year reporting the following information: Income from salaries.................................................. $65,000 Interest income.............................................................. 5,000 Qualified dividend income............................................ 18,000 Capital gain from sale of stock held 15 years................. 25,000 Capital loss from sale of stock held 5 years .................. (5,400) Itemized expenses........................................................ 22,600 Compute the couple’s regular taxable income and their regular 2019 tax liability using the applicable rates for their ordinary income and any alternative rates...
How do you set this up in Excel? Gallant Company reported net income of $2,500,000. The...
How do you set this up in Excel? Gallant Company reported net income of $2,500,000. The income statement included a $500,000 gain from condemnation of land and a $200,000 loss on discontinued operations, both after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. Prepare the earnings per share section of Gallant Company’s income statement.
St. Sebastian Company has forecasted a net income of $5,100,000 for this year. Its common stock...
St. Sebastian Company has forecasted a net income of $5,100,000 for this year. Its common stock currently trades at $22 per share, and the company currently has 720,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them. As a result, St. Sebastian’s management is considering making a share repurchase transaction in which it would buy back...