John owns 1000 shares of a Canadian Real Estate Investment Trust (REIT). The corporation earns $10 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and John’s personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for John after all taxes have been paid?
=> In this question, the corporate tax = 40%
* Earning per share after the corporate tax is paid = Earning per share before tax is paid * (1 - corporate tax rate)
* EPS after all tax is paid = 10*(1-40%) = 10*0.60 = $ 6
* That means the the company will distribute $ 6 per share as dividend
=> John is having 1000 shares and he will get 6*1000 = $ 6000 as dividend from the company
=> His personal tax rate is 30% and after paying all the taxes he will have an amount
= 6000*(1-30%) [ Income*(1-tax rate)]
= $ 4200
Therefore the answer is option c. 4200
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