Tofino Toffee is a corporation that earned $5 per share before it paid any taxes.The firm retained $2.50 of after-tax earnings for reinvestment,and distributed what remained in dividend payments.You hold 6,000 shares of Tofino Toffee in a tax-free savings account,and 4,000 shares outside of a tax-free savings account.If the corporate tax rate was 25% and dividend earnings were taxed at 15%,what was the value of your dividend earnings received after all taxes are paid?

Question

Quizplus · Accepted Answer

First, we need to calculate how much Tofino Toffee retained for reinvestment per share:
Retained earnings per share = $2.50
Next, we need to calculate how much Tofino Toffee distributed per share:
Dividend per share = $5.00 - $2.50 = $2.50

For the shares held within a tax-free savings account:
- The shareholder does not pay taxes on the retained earnings for reinvestment ($2.50 per share)
- The shareholder does not pay taxes on the dividend earnings ($2.50 per share)

Therefore, the total dividend earnings received after all taxes are paid for the 6,000 shares held within a tax-free savings account is:
Total dividend earnings = 6,000 shares x $2.50 dividend per share = $15,000

For the shares held outside of a tax-free savings account:
- Tofino Toffee paid taxes on the retained earnings for reinvestment (25% of $2.50 per share = $0.625 per share)
- The shareholder pays taxes on the dividend earnings (15% of $2.50 per share = $0.375 per share)

Therefore, the total dividend earnings received after all taxes are paid for the 4,000 shares held outside of a tax-free savings account is:
Total dividend earnings = 4,000 shares x $2.50 dividend per share - 4,000 shares x $0.625 tax on retained earnings per share - 4,000 shares x $0.375 tax on dividend per share
Total dividend earnings = $10,000 - $2,500 - $1,500 = $6,000

The total dividend earnings received after all taxes are paid for all shares is:
Total dividend earnings = $15,000 + $6,000 = $21,000
However, we only need to find the value of dividend earnings received for the 4,000 shares held outside of a tax-free savings account. Therefore, the answer is:
Answer: B) $11,750

Tofino Toffee Is a Corporation That Earned $5 Per Share