A C corporation earns $4.50 per share before taxes.The corporate tax rate is 35%,the personal tax rate on dividends is 20%,and the personal tax rate on non-dividend income is 39%.What is the total amount of taxes paid if the company pays a $2.00 dividend?

Question

Quizplus · Accepted Answer

First, the corporation pays taxes on its earnings before distributing dividends. So the taxes paid by the corporation would be:

Tax = 0.35 x $4.50 = $1.58 per share

After taxes, the earnings available for distribution as a dividend would be:

Earnings after tax = $4.50 - $1.58 = $2.92 per share

When a dividend is paid, the shareholders also pay taxes on it. The taxes on the $2.00 dividend would be:

Tax on dividend = 0.20 x $2.00 = $0.40 per share

The total taxes paid (by the corporation and by the shareholder) would then be:

Total tax = $1.58 + $0.40 = $1.98 per share

Therefore, the answer is C.

A C Corporation Earns $4