Section III Bonus Questions You are a shareholder in a corpo

Section III. Bonus Questions: You are a shareholder in a corporation. The corporation earns $10 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you asa dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 20%. what is the effective tax rate\'? 1. 2. How long will it take to make your investment double? A. If the expected annual return is 10%? B. If the expected annual return is 20%? C. If the expected semi-annual return is 10%?

Solution

1. Corporate Taxes = $10*0.35 = $3.50

After-Tax Earnings = $10 - $3.50 = $6.50

Dividend Taxes = $6.50*0.10 = $0.65

Income after Taxes = $6.50 - $0.65 = $5.85

Total Taxes = $3.50 + $0.65 = $4.15

Total Effective Tax Rate = $4.15/$10 = 41.5%

2. WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING:

a. I = 10

PV = -1

PMT = 0

FV = 2

Now, solve for N = 7.27 years

b. WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING:

I = 20

PV = -1

PMT = 0

FV = 2

Now, solve for N = 3.80 years

c. WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING:

I = 5

PV = -1

PMT = 0

FV = 2

Now, solve for N = 14.21

Number of Years = 14.21/2 = 7.10 years