Question

The Talley Corporation had taxable operating income of $300,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $50,000, (2) dividends received of $25,000, and (3) dividends paid of $40,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt. What is the firm’s taxable income, tax expense, after tax exspense?

Answer 1

Taxable Operating Income = $300,000

Interest charges = $50,000

Dividend received = $25,000

Dividend paid = $40,000

Tax rate = 21%

50% of dividends received are tax exempt

Taxable Income = Taxable Operating Income + Taxable dividend received - Interest charges

= $300,000+$25,000*0.50-$50,000

= $262,500

Tax expenses = Taxable income*Tax rate

= $262,500*0.21

= $55,125

Income after tax = Taxable Income – Tax - Dividend paid

= $262,500-$55,125-$40,000

= $167,375