You own 100 shares in each of two different companies,Ace Holdings,and Beta Inc.Ace Holdings earns $6.00 per share before taxes,has a corporate tax rate of 25%,and pays out 50% of its after-tax earnings as dividends.Beta Inc.earns $4.00 per share before taxes,has a corporate tax rate of 15%,and pays out 100% of its after-tax earnings as dividends.The tax rate on dividend income is 15%.If your shares of Ace Holdings are held outside of a TFSA,and your shares of Beta Inc.are held inside a TFSA,what is the total after-tax income you receive from your dividends?

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax earnings per share for each company.

For Ace Holdings:
- $6.00 earnings per share before taxes
- 25% corporate tax rate
- $4.50 earnings per share after taxes ([$6.00 x (1 - 0.25)])

Ace Holdings pays out 50% of its after-tax earnings as dividends:
- $2.25 dividends per share ([50% x $4.50])

For Beta Inc.:
- $4.00 earnings per share before taxes
- 15% corporate tax rate
- $3.40 earnings per share after taxes ([$4.00 x (1 - 0.15)])

Beta Inc. pays out 100% of its after-tax earnings as dividends:
- $3.40 dividends per share

Now we can calculate the total after-tax income from dividends:
- Ace Holdings: $2.25 per share x 100 shares = $225
- Beta Inc.: $3.40 per share x 100 shares = $340
- Total before tax: $225 + $340 = $565

However, we need to consider the tax rate on dividend income. Since the shares of Beta Inc. are held inside a TFSA, they are not subject to dividend tax. The shares of Ace Holdings held outside of a TFSA are subject to a 15% dividend tax.

- Dividend tax on Ace Holdings: $225 x 0.15 = $33.75
- Total after-tax income from dividends: $565 - $33.75 = $531.25

Therefore, the best choice is D, with a total after-tax dividend income of $531.25.

You Own 100 Shares in Each of Two Different Companies,Ace