Question

ValiantCorp is a C corporation that earned $ 3.90$3.90 per share before it paid any taxes. ValiantCorp retained​ $1 of after tax earnings for​ reinvestment, and distributed what remained in dividend payments. If the corporate tax rate was 3535​% and dividend earnings were taxed at​ 12.5%, what was the value of the dividend earnings received after tax by a holder of​ 100,000 shares of​ ValiantCorp?
(A) $ 134,313
(B) $134,313
(C) $ 188,038

Answer 1

Answer: Option(A) is correct.

Explanation:

Earnings before tax = $3.90

Tax rate on dividend payment = 12.5%

Corporate Tax rate = 35%

Shareholder holds = 100,000 shares

Earnings after tax = $3.90 × (1 – 35%)

                              = $2.535

Valiant Corp retained​ $1 of after tax earnings for​ reinvestment,

Therefore,

Value available for dividend payment = $2.535 - $1

                                                                = $1.535

After tax dividend received by shareholder for one share = $1.535 × (1 – 12.50%)

                                                                                                 = $1.343125

Total dividend received by shareholder = 100,000 × $1.343125

                                                                      = $134,312.50