Question #44
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 17
Status: Unattempted
Question
International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends, and the individual tax rate that applies to dividends is 40%. What is the effective tax rate on corporate earnings paid out as dividends?
Answer Choices:
A. 48%
B. 70%
C. 58%
Explanation
This is an example of a split-rate corporate tax system. The calculation of the effective tax
rate on a Swiss franc of corporate income distributed as dividends is based on the
corporate tax rate for distributed income.
The effective tax rate on income distributed as dividends = 30% + [(1 − 30%) × 40%] = 58%.