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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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