Suppose that the corporate income tax rate is 30%, the personal income tax rate on dividend income
Question:
Suppose that the corporate income tax rate is 30%, the personal income tax rate on dividend income and the interest tax rate are both 35%, and the capital gains tax rate is 20%. Compare the after-tax returns on each dollar of corporate earnings under three investment financing strategies:
a. The corporation finances using debt.
b. The corporation finances by issuing equity but does not pay dividends.
c. The corporation finances by equity and pays all its income in dividends.
Corporation A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...Dividend A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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a When a corporation uses debt financing it pays interest to bondholders and deducts the interest pa...View the full answer
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