Question

"Consider a C corporation. The corporation earns $13 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 0% of its earnings to its shareholders as a dividend. The corporate tax rate is 42%, the tax rate on dividend income is 27%, and the personal income tax rate is set at 20%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid?"

Answer 1

Answer:

$1.41144

Explanation:

Assuming that distribution of its earning to its shareholder is 30% as against the 0% which is likely a mistake because the tax rate on dividend income of 27% is also given in the question

Earning before tax                $13

Less: Corporation tax           $5.46

($13 * 42%)

Earnings after tax                 $7.54

Dividend distribution = $7.54 * 30% = $2.262

After tax dividend = $2.262 * (1-0.27) = $2.262 * 0.78 = $1.7643

Shareholder earnings after Income tax = $1.7643 * (1 - 0.20) = $1.7643 * 0.80 = $1.41144

Therefore, the Shareholder earnings from the Corporation assuming the distribution of its earning to its shareholder is 30% is $1.41144