Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 1 Consider a business owned by a single individual who is considering whether or not to incorporate the business. The only factor he/she is

image text in transcribed

Question 1 Consider a business owned by a single individual who is considering whether or not to incorporate the business. The only factor he/she is considering in his/her decision is tax liability. Suppose his/her tax rate on personal income is 40%. The corporate tax rate is 30% and his/her tax rate of dividend income is 25%. Suppose the annual income of the business after all tax deductions will be $800,000. i. Assume that if he/she would incorporate, he/she would not pay any salary to himself/herself. With the dividends payout ratio of 30%, should he/she incorporate the business. ii. If the dividends payout ratio is 70%, is incorporation desirable? iii. Find dividends payout ratio which will make him/her indifferent between incorporation and non-incorporation

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions