(a) What is a dividend and why is it taxed at a lower rate than regular income?
ID: 1128296 • Letter: #
Question
(a) What is a dividend and why is it taxed at a lower rate than regular income? (b) Give an example of a service unit of depreciation and an example of a company that might use that service unit. (c) Show all appropriate T-account entries that should be made when a sale is made for $10,000 and the S10,000 is to be received in 30 days. (d) What is leverage? What (bad thing) can happen to a company which uses too much leverage? (e) How does Statistics Canada determine the Consumer Price Index? (f) How (or under what condition) might it be reasonable to describe common share A (common stock A) as cheaper than common share B even though A trades at $60.00 and B trades at $30.00? (g) What is an economic life? Include an appropriate diagram to explain your answer. (h) A bond is purchased today for S105.00, pays $8.00 in one year and is redeemed for $108.00 in two years. Set up the equation to determine the real rate of return (i) on the bond if inflation has been 2% over the two years? Do not attempt to solve the equation (i) Identify two key features of an investment which should be considered in the selection of an appropriate MARR. G) What is the best way for an individual to protect their wealth during an inflationary economy?Explanation / Answer
First question is answered below.
a)
Dividend is the money paid out by a company to its shareholders out of its profits. This money is paid out annually. This is a capital gain for investors and is taxed at a lower rate than regular income.
The reason behind this strategy is:
· High tax on investment income will deincentivize investors who will then start reducing their investment made
· Tax on capital gain is already like a double taxation of income. Reason being, a consumer earns salary on which he pays tax. Then he consumes a part of this salary and saves and invests the other part of it. The return on this investment is again taxed by the government. This makes it important to keep this tax rate low so that consumers are not taxed heavily, leaving them with nothing at the end.
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