ValiantCorp is a corporation that earned $3 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 30% 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?

Question

Quizplus · Accepted Answer

First, we need to calculate how much ValiantCorp earned after taxes:

- Earned $3 per share before taxes 
- Corporate tax rate of 30%: $3 x 0.3 = $0.9 tax per share 
- After-tax earnings: $3 - $0.9 = $2.1 per share

ValiantCorp retained $1 of after-tax earnings for reinvestment, and distributed the rest as dividends:

- Dividends per share: $2.1 - $1 = $1.1 
- Dividend earnings are taxed at 12.5%: $1.1 x 0.125 = $0.1375 tax per share

To find the value of the dividend earnings received after tax by a holder of 100,000 shares of ValiantCorp:

- 100,000 shares x $1.1 dividend per share = $110,000 total dividend earnings 
- $110,000 x 0.125 = $13,750 total tax on the dividend earnings 
- $110,000 - $13,750 = $96,250 dividend earnings received after tax

Therefore, the best choice is B.

ValiantCorp Is a Corporation That Earned $3 Per Share Before