4 New Business is just being formed by 20investors, each of whom will own 5% of thebusiness. The firm is expected to earn$1,600,000 before taxes each year. Thecorporate tax rate is 34% and the personal taxrate for the firm's investors is 24%. The firmdoes not need to retain any earnings, so all ofits after-tax income will be paid out asdividends to its investors. The investors willhave to pay personal taxes on whatever theyreceive. How much additional spendableincome will each investor have if the businessis organized as a partnership rather than as acorporation?a. $8,000b. $6,592c. $20,672d. $14,592e. $25,952

Total tax savings = (difference in tax rate)*taxable income

Answered: New Business is just being forme…

New Business is just being forme investors, each of whom will own business. The firm is expected to $1,600,000 before taxes each yea corporate tax rate is 34% and the

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section2.A: Taxes

Problem 6P

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

New Business is just being formed by 20
investors, each of whom will own 5% of the
business. The firm is expected to earn
$1,600,000 before taxes each year. The
corporate tax rate is 34% and the personal tax
rate for the firm's investors is 24%. The firm
does not need to retain any earnings, so all of
its after-tax income will be paid out as
dividends to its investors. The investors will
have to pay personal taxes on whatever they
receive. How much additional spendable
income will each investor have if the business
is organized as a partnership rather than as a
corporation?
a. $8,000
b. $6,592
c. $20,672
d. $14,592
e. $25,952

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