Question

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Consider a C corporation. The corporation earns $2 per share before taxes.

Consider a C corporation. The corporation earns $2 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 50% of its earnings to its shareholders as a dividend. The corporate tax rate is 35%, the tax rate on dividend income is 20%, and the personal income tax rate is set at 28%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid?

Expert Solution

Earnings before tax = $2

less: corporate Tax ($2 * 35%) = $0.7

Earnings after tax = $1.3

Distributes 50 % of it earnings to its shareholders as a dividend

Dividend distribution = $1.30 * 50%

= $0.65

Tax rate on dividend income is 20%

Dividend after tax = $0.65 * ( 1 – tax rate)

= $0.65 * (1 – 0.20)

= $0.65 * 0.80

= $0.52

Personal income tax rate is 28%

shareholders earnings after income tax = $0.52 * (1 – 0.28)

= $0.52 * 0.72

= $0.3744

The shareholders earnings from the corporation after all corresponding taxes are paid is $0.3744

jeff jeffy answered 2 years ago

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