Question

# QUESTION 4 Consider a C corporation. The corporation earns \$13 per share before taxes. After the...

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?

(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%

[Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.]

#### Earn Coins

Coins can be redeemed for fabulous gifts.