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School

University of Ottawa *

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Course

2352X

Subject

Finance

Date

Jan 9, 2024

Type

png

Pages

1

Uploaded by AdmiralFlagSeaUrchin26

18) You are a shareholder in a publicly owned corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to: A) 15% B) 35% C) 45% D) 50% Answer: C Explanation: First the corporation pays taxes. It earned $4 per share, but must pay $4 x .35 = $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the shareholders. However, the shareholder must pay $2.60 x .15 = $0.39 in income taxes on this amount, leaving only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + 0.39 =$1.79. The effective tax rate is then $1.79 + $4 = .4475 or 44.75% which is closest to 45%. Diff:3 Type: MC Topic: 1.1 The Three Types of Firms
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