Question

QUESTION 4

1. Consider a C corporation. The corporation earns $13 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 58% of its earnings to its shareholders as a dividend. The corporate tax rate is 35%, the tax rate on dividend income is 25%, and the personal income tax rate is set at 22%. How much is the total effective tax rate on the corporation earnings?

Answer 1

Answers:

(1) Earnings per Share (EBT) before taxes = $13

(2) Tax @ 35% = $4.55

(3) Earnings per Share (EBT) after Tax = (1) – (2) = $13 - $4.55 = $8.45

(4) Person tax rate @22% = $8.45 * 22% = $1.859

(5) Earnings left = (3) – (4) = $8.45 - $1.859 = $6.591

The total effective tax rate on the corporation’s earnings is,

                                    = Taxes Paid / Taxable Income

= $4.55+$1.859/$13

= $6.409/$13

= 0.493 = 49.30%

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