Question

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?

a.3000

b.3200

c.4200

d.6000

e.7000

Answer 1

=> 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