You are a shareholder in a corporation. The corporation earns $4 per share before taxes. Once...

You are a shareholder in a corporation. The corporation earns $4 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 34% and the personal tax rate on dividend income is 25%.

1. How much is left for you after all taxes are paid?

2. What is your total effective tax rate?

Expert Solution

1. Earnings per share before taxes = $4

Corporate tax rate = 34%

Earnings per share after taxes = Dividend per share = Earnings per share before taxes - Corporate tax = Earnings per share before taxes - Earnings per share before taxes x corporate tax rate = $4 x $4 x 34% = 4 - $1.36 = $2.64

Personal tax rate on dividend income = 25%

Amount left after all taxes are paid = Dividend per share - Personal income tax on dividends = Dividend per share - Dividend per share x Personal income tax rate on dividends = 2.64 - 2.64 x 25% = 2.64 - 0.66 = 1.98

Amount left after all taxes are paid = $1.98

2. Total tax = Corporate tax + Personal income tax on dividends = 1.36 + 0.66 = 2.02

Earnings per share before taxes = $4

Total Effective tax rate = Total tax / Earnings per share before taxes = 2.02 / 4 = 0.5050 = 50.50%

Hence Total Effective tax rate = 50.50%

jeff jeffy answered 2 years ago

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