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Consider a C corporation. The corporation earns $5 per sharebefore taxes. After the corporation has...

Consider a C corporation. The corporation earns $5 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 40%, the tax rate on dividend income is 28%, 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? Show your calculations

How much is the total effective tax rate on the corporation earnings? Please Show your calculations

Solutions

Expert Solution

EPS = $5

Earnings after corporate taxes = $5 * (1-0.4) = $3

Earnings after dividends = 0.5 * 3 = $1.5

Total income after profit = $1.5 * (1 - 0.28)2  = $0.78

Total taxes paid by firm = $2 + $1.5 - $0.78 = $2.72

Effective tax rate = 2.72/5 = 54.48%

jeff jeffy answered 2 years ago
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